ECON 100 Lecture 25 Monday, December 15

Announcements MIDTERM #2: Wednesday December 24, starts at 7 P.M. Only material covered in lectures will be on the midterm. 1st midterm topics demand/supply etc are NOT included Course webpage : https://ais.ku.edu.tr/course/25089/Default.html

Announcements MIDTERM #2: Wednesday December 24, starts at 7 P.M. Midterm #2 topics GDP, CPI and inflation, Unemployment, Production and growth (today) The financial system: savings and investment (Wednesday) Midterm exam #2 for Spring 2014, 2013, and 2012 are posted on course webpage (with answers). Announcements section. Answers to PS #10 are posted on webpage. PS#11 is the last exercise set before the second midterm exam. It will be posted later in the week. Course webpage : https://ais.ku.edu.tr/course/25089/Default.html

Problem Session / KOLT tutors PS1: FRIDAY B4 (at 13:00) in room SOS B21 PS2: FRIDAY B5 (at 14:30) in room SOS B08 Econ 100 KOLT tutors: Sonkurt, Jülide, and Ilgaz

Production and Growth

Imagine a country where Life expectancy at birth < 50 years. More than 95 percent of all births takes place at home. About 1 in 10 children die before their first birthday. The top three leading causes of death are pneumonia and influenza, tuberculosis, and diarrhea. Only six percent of all citizens graduate from high school. Only 3% of the homes have electricity. Only 15% of homes have indoor flush toilets. This country is the USA in year 1900! 6

The immense improvement in the living standards and welfare experienced in the US in the 20th century is the result of sustained long term economic growth. 7

US; per capita GDP, 1900 to 2006

GDP per capita TURKEY in constant 1948 producer prices source: “İSTATİSTİK GÖSTERGELER” – Statistical Indicators, 1923-2011, TUIK publication number 3890 In 1923 GDP per capita was 233TL, In 2011 GDP per capita was 1824TL This is equivalent to a 2,35% constant growth rate per year.

The long run average growth rate of per capita GDP is about 3.2% This is from “Sources of longterm economic growth for Turkey, 1880– 2005” by Sumru Altuğ, Alpay Filiztekin, and Şevket Pamuk The long run average growth rate of per capita GDP is about 3.2% The long run average growth rate of per capita GDP is about 3.2%. GDP per capita is PPP adjusted in 1990 US dollars. Sources of longterm economic growth for Turkey, 1880– 2005. SUMRU ALTUG, ALPAY FILIZTEKIN and ŞEVKET PAMUK. European Review of Economic History / Volume 12 / Issue 03 / December 2008, pp 393 430

from “Economic Growth”, 2nd ed from “Economic Growth”, 2nd ed. by Robert Barro and Xavier Sala-i-Martin 2003 MIT Press

Impact of higher GDP per capita on people’s lives TURKEY

Life expectancy at birth Hacettepe Universitesi Nufus Etutleri Enstitusu Türkiye’nin Demografik Dönüşümü: Doğurganlık, Aile Planlaması, Anne‐Çocuk Sağlığı ve Beş Yaş Altı Ölümlerdeki Değişimler: 1968‐2008

Literacy (age 6+)

Maternal mortality per 100,000 birth 1975 - 2005

Infant mortality 1945 – 2008 (per thousands)

Turkey’s growth performance relative to a number of selected countries

http://turkishmarketnews.com/story-90-years-two-charts/

Turkey vs. The World

GDP figures around the world, 2013

GDP figures around the world 2013 World Development Indicators database, World Bank, 22 September 2014 World 74,909,811 (this is 75 trillions of USD) Euro area 12,749,677 1 United States 16,800,000 2 China 9,240,270 3 Japan 4,901,530 4 Germany 3,634,823 5 France 2,734,949 6 United Kingdom 2,521,381 7 Brazil 2,245,673 8 Russian Federation 2,096,777 9 Italy 2,071,307 10 India 1,876,797 http://databank.worldbank.org/data/download/GDP.pdf

11 Canada 1,826,769 12 Australia 1,560,597 13 Spain 1,358,263 14 Korea, Rep 1,304,554 15 Mexico 1,260,915 16 Indonesia 868,346 17 Turkey 820,207 18 Netherlands 800,173 19 Saudi Arabia 745,273 20 Switzerland 650,377

These are the GDP ranking with PPP 1 US 16,800,000 2 China 16,157,704 3 India 6,774,441 4 Japan 4,624,359 5 Germany 3,493,479 6 Russian Fed 3,461,259 7 Brazil 3,012,197 8 France 2,436,930 9 Indonesia 2,388,413 10 UK 2,320,104 11 Italy 2,052,364 12 Mexico 2,014,006 13 Korea, Rep 1,664,259 14 Saudi Arabia 1,550,429 15 Canada 1,520,493 16 Spain 1,497,545 17 Turkey 1,421,881 18 Iran 1,207,118 19 Australia 1,007,353 20 Nigeria 972,426 PPP is purchasing power parity; an international dollar has the same purchasing power over GDP as a U.S. dollar has in the United http://databank.worldbank.org/data/download/GDP_PPP.pdf

Here we start our systematic study of “production and growth

Questions What are the facts about living standards and growth rates around the world? What is productivity and why does it matter for living standards? What determines productivity and its growth rate? What can governments do to raise productivity and living standards of their citizens?

Q1, facts, summarized… Economic prosperity, (measured by per capita GDP), varies a lot across countries. The per capita incomes in rich countries are 40 – 50 times that in the poor countries. Real per capita GDP growth rates vary a lot across countries. Economic prosperity ≈ living standards ≈ per capita GDP

Incomes and Growth Around the World GDP per capita, 2009 Growth rate, 1970–2009 China $6,828 7.4% Singapore $50,633 4.7% India $3,296 3.3% Japan $32,418 2.2% Spain $32,150 2.1% Israel $27,656 Colombia $8,959 1.9% United States $45,989 1.8% Canada $37,808 1.7% Philippines $3,542 1.3% Rwanda $1,136 1.1% New Zealand $28,993 Argentina $14,538 1.0% Saudi Arabia $23,480 0.6% Chad $1,300 0.4% FACT 1: Big differences in living standards around the world. 28

Incomes and Growth Around the World GDP per capita, 2009 Growth rate, 1970–2009 China $6,828 7.4% Singapore $50,633 4.7% India $3,296 3.3% Japan $32,418 2.2% Spain $32,150 2.1% Israel $27,656 Colombia $8,959 1.9% United States $45,989 1.8% Canada $37,808 1.7% Philippines $3,542 1.3% Rwanda $1,136 1.1% New Zealand $28,993 Argentina $14,538 1.0% Saudi Arabia $23,480 0.6% Chad $1,300 0.4% FACT 2: Huge variations in growth rates across countries. These are average growth rate over a 40 year period. 29

from Midterm exam #2 Spring 2014 37 If one wants to know how the material well-being of the average person has changed over time in a given country, one should look at the a. level of real GDP. b. growth rate of nominal GDP. c. growth rate of real GDP. d. growth rate of real GDP per person.

Growth Rates and the Rule of 70 Growth rate from one year to the next

Per capita GDP grows at the rate of 2. 5% every year Per capita GDP grows at the rate of 2.5% every year. How many years are needed for the per capita GDP to double? Say from $10,000 to $20,000?

Growth Rates and the Rule of 70 If we assume that the growth rate is constant, then

Question: If the per capita GDP grows at the rate of 2 Question: If the per capita GDP grows at the rate of 2.5% every year for a country, how many years are needed for the per capita GDP to double? Answer: 70/2.5 = 28 years!

from Midterm exam #2 Spring 2014 35 In some East Asian countries real GDP per person has grown at an average annual rate of 7%. This implies that real GDP per person in those countries doubles about every a. 15 years. b. 10 years. c. 20 years. d. 25 years. ANSWER: 10 years

Growth Rates and the Rule of 70 If per capita GDP grows at 7%, then it doubles every 10 years. If per capita GDP grows at 2%, then it doubles every 35 years.

Growth Rates and the Rule of 70 If real GDP per capita doubles every 10 years, most people in the country see significant increases in their living standards over the course of their lives. If real GDP per capita doubles only every 100 years, then the increase in living standard is much lower.

Questions What is productivity and why does it matter for living standards?

Productivity A country’s standard of living depend on its ability to produce goods and services. This ability depends on productivity. Productivity is defined as the average quantity of goods and services produced per unit of labor input. Y = real GDP = quantity of output produced L = quantity of labor So productivity = Y/L (output per worker)

from Midterm exam #2 Spring 2014 38 The average amount of goods and services produced from each hour of a worker’s time is called a. per capita GNP b. productivity c. human capital d. per capita GDP ANSWER: B

from Midterm exam #2 Spring 2014 36. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000 of whom 1,800 work 6 hours a day to make 270,000 final goods a. Country B has lower productivity, but higher real GDP per person than country B. b. Country A has higher productivity, but lower real GDP per person than country B. c. Country A has lower productivity and lower real GDP per person than country B. d. Country A has higher productivity and higher real GDP per person than country B. ANSWER C For this question: Productivity is number of final goods/number of total hours worked, and per capita GDP number of final goods/population

Why Productivity Is So Important When a nation’s workers are very productive, real GDP is large and incomes are high. When productivity grows rapidly, so do living standards. 42

GDP and quality of life Having a large GDP means that a country can afford better schools, a cleaner environment, better health care, etc. Many indicators of the quality of life are positively correlated with GDP. Then why do we care about GDP? Because a large GDP does in fact help us to lead a good life. GDP does not measure the health of our children, but nations with larger GDP can afford better health care for their children. GDP does not measure the beauty of our poetry, but nations with larger GDP can afford to teach more of their citizens to read and enjoy poetry. GDP does not take account of our intelligence, integrity, courage, wisdom, or devotion to country, but all of these laudable attributes are easier to foster when people are less concerned about being able to afford the material necessities of life. In short, GDP does not directly measure those things that make life worthwhile, but it does measure our ability to obtain the inputs into a worthwhile life.

GDP and Life Expectancy in 12 Countries Life expectancy (in years) Japan U.S. Germany Mexico China Brazil Indonesia Russia India Pakistan This figure and the two that follow are from the data in Table 23-3 of the textbook. See that table for a full list of the included countries. Real GDP per capita figures are expressed in U.S. dollars. Source: Human Development Report 2004, United Nations. Bangladesh Nigeria Real GDP per capita, 2002

GDP and Adult Literacy in 12 Countries Adult Literacy (% of population) Russia China U.S. Japan Mexico Germany Brazil Indonesia Nigeria India Pakistan Source: Human Development Report 2004, United Nations. Bangladesh Real GDP per capita, 2002

What determines productivity and its growth rate? 46

Questions What determines productivity and its growth rate?

Physical Capital Per Worker The stock of equipment (tools and machinery) and structures (buildings) used to produce goods service is called [physical] capital, denoted K. K/L = capital per worker. Productivity is higher when the average worker has more capital (machines, equipment, etc.). i.e., an increase in K/L causes an increase in Y/L. 48

1. Which of the following would be considered physical capital. a 1. Which of the following would be considered physical capital? a. the pizza oven at the Liquidity Preferences Tavern b. rivers on which goods are transported c. the skills and knowledge of a barber d. All of the above are correct. ANSWER is A

2. Which of the following would not be considered physical capital? a. a new factory building b. a computer used to help Mercury Delivery Service keep track of its orders c. on-the-job training d. a desk used in an accountant’s office ANSWER is C

Human Capital Per Worker Human capital (H): the knowledge and skills workers get through education, training, and work experience. H/L = the average worker’s human capital Productivity is higher when the average worker has more human capital (education, skills, training, etc.). i.e., an increase in H/L causes an increase in Y/L. 51

3. Which of the following is human capital? a. a student loan b. the employee’s ability and understanding how to use the company’s accounting software c. training videos for new corporate employees d. All of the above are correct. ANSWER is B

4. Which of the following is considered human capital? a. the comfortable chair in your dorm room where you read economics texts b. the amount you get paid each week to work at the library c. the things you have learned this semester d. any capital goods that require a human to be present to operate ANSWER is C

from Midterm exam #2 Spring 2014 39 Which of the following would be human capital and physical capital respectively? a. for an accounting firm, “the accountants knowledge of tax laws”, and “computer software the firm is using” b. for a grocery store, grocery carts and shelving c. for a school, chalkboard and desks d. for a library, the building and the reference librarians’ knowledge of the Internet ANWER is A

Natural Resources Per Worker Natural resources (N): the inputs into production that nature provides, e.g., land, mineral deposits Some countries are rich because they have abundant natural resources (e.g., Saudi Arabia, Russia, Venezualla, Norway have lots of oil). But countries need not have much N to be rich (e.g., Japan, South Korea import the N they need). 55

Technological Knowledge Technological knowledge: society’s understanding of the best ways to produce goods and services. Technological progress: any advance in knowledge that increases productivity (allows society to get more output from its resources). 56

Technological Knowledge vs. Human Capital Technological knowledge = society’s understanding of how to produce goods and services. Human capital results from the effort people expend to acquire this knowledge. Both are important for productivity. 57

Questions What can governments do to raise productivity? How can public policy affect growth and living standards?

Government Policies That Raise Productivity and Living Standards Encourage saving and investment. More physical capital, this will raise K/L Encourage education and training. More human capital, this will raise H/L Promote research and development. This will improve the available technology

Government Policies That Raise Productivity and Living Standards Establish secure property rights and maintain political stability. Promote free trade. Control population growth. Wonderful book, 23 things they don’t tell you about capitalism, by Ha Joon Chang

Ha-Joon Chang: The net isn't as important as we think The economist and author says the washing machine changed the world more than the internet, a tool we overestimate while ignoring its downsides In his new book, 23 Things They Don't Tell You About Capitalism, Chang debunks many cherished myths about the free market. In one chapter, he says: "The washing machine changed the world more than the internet." http://www.theguardian.com/technology/2010/aug/29/my-bright-idea-ha-joon-chang

End of the lecture