1. MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
4/21/2017
MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
Total Factor Productivity, Human Capital, and Technology
PowerPoint by Beth Ingram
University of Iowa
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.

2. Key Concepts Total Factor Productivity Human Capital
Technological Progress
Foreign Direct Investment

3. Effect of shift in production function
4/21/2017
Effect of shift in production function
Production Function, New
Production Function, Old
Real GDP
Depreciation
Investment, New
Investment, Old K0 K1
Capital

4. Production Function Shift
Increase in Output due to function shift
Increase in Labor
Increase in TFP
Increase in Output due to increase in capital
Economy moves to new steady state
As capital increases, output increases
Why does production function shift?

5. Human Capital
Skills and knowledge that accumulate over time, embodied in people

6. Human Capital GDP per capita =
Human Capital increases Labor Productivity

7. More human capital Real GDP Capital Output, High Human Capital
4/21/2017
More human capital
Output, High Human Capital
Output, Low Human Capital
Real GDP
Depreciation
Investment, High
Investment, Low
KLow
KHigh
Capital

8. Human Capital
Increase means more output, even at current levels of physical capital and labor
Increase means higher steady state level of output and capital
May explain cross-country growth differentials

9. Contribution to Growth
Contribution of Education to Annual Output Growth, 1950 – 1990

10. How to increase human capital?
Educational attainment
Expenditures on education
Allocation of resources
Level of education
Cost of education

11. Schooling Differences Across Countries
Average Years of Schooling

12. Percentage of students completing the final year of primary school
Source: World Bank Millennium Development Goals

13. Review
Cross-country differentials in per capita output are substantial
Role of physical capital
Role of human capital
Significant fraction of differential is unexplained – we call this “TFP”
Other elements of TFP

14. Institutions Property Rights Regulatory Institutions
Macroeconomic Stabilization
Social Insurance
Conflict Management
Political Rights

15. World Bank Indicators Voice and accountability
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World Bank Indicators
Voice and accountability
Political stability and lack of violence
Government effectiveness
Regulation quality
Rule of law
Corruption
Link is the the world bank indicators page, source of data on next two slides.

16. Political Stability Bottom 10 Top 10 NEW ZEALAND NETHERLANDS SWEDEN
PORTUGAL
NORWAY
MALTA
LUXEMBOURG
ICELAND
SWITZERLAND
FINLAND
Congo, Dem. Rep. (Zaire)
LIBERIA
AFGHANISTAN
IVORY COAST
BURUNDI
SOMALIA
SUDAN
GEORGIA
CENTRAL AFRICAN REPUBLIC
COLOMBIA

17. Corruption Bottom 10 Top 10 Congo, Dem. Rep. (Zaire) LIBERIA SOMALIA
IRAQ
MYANMAR
CAMBODIA
TURKMENISTAN
TAJIKISTAN
CAMEROON
ANGOLA
ICELAND
NORWAY
NETHERLANDS
CANADA
SINGAPORE
NEW ZEALAND
SWEDEN
FINLAND
DENMARK
SWITZERLAND

18. Rent Seeking
Activity in which value-added produced by one person is taken by another
Examples
Water subsidies
Sugar tariffs
Insider contracts or trading
Concerns
Absorbs resources (labor and capital)
Acts as a tax
Rent seeking crowds out production

19. R & D Growth can be sustained through technological progress
Role of Research and Development in promoting technological progress
Example of South Korea

20. South Korean R&D as a percentage of GDP

21. Rich countries spend more on R&D
200
400
600
800
5000
10000
15000
20000
25000
30000
35000
GDP per Capita, 1997
R&D per Capita, 1997

22. Foreign Direct Investment
Investment by foreign firms in an economy
Encourages capital accumulation and technology transfer
Can facilitate convergence among countries

23. Foreign Direct Investment (FDI)
Net Foreign Direct Investment, (billions of US $)

24. The New Economy Role of ICT How does IT produce growth?
Information and Communication Technology (sometimes just IT)
How does IT produce growth?
Through capital accumulation
TFP gains in adopting sectors
TFP in sectors that produce IT

25. IT Industry share of GDP (%), 1990s
Source: OECD Economic Outlook, June 2000

26. Contribution of IT capital to US non-farm business output
Source : Oliner and Sichel (2000) The resurgence of Growth in the late 1990s : Is IT the story? Federal Reserve Board mimeo

27. Summary Effect of increases in TFP
Effect of human capital accumulation
Other influences on growth
Institutions
Technological Progress
FDI
IT capital accumulation
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.