MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT 11/28/2018 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.

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

Effect of shift in production function 11/28/2018 Effect of shift in production function Production Function, New Production Function, Old Real GDP Depreciation Investment, New Investment, Old K0 K1 Capital

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?

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

Human Capital GDP per capita = Human Capital increases Labor Productivity

More human capital Real GDP Capital Output, High Human Capital 11/28/2018 More human capital Output, High Human Capital Output, Low Human Capital Real GDP Depreciation Investment, High Investment, Low KLow KHigh Capital

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

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

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

Schooling Differences Across Countries Average Years of Schooling

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

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

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

World Bank Indicators Voice and accountability 11/28/2018 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.

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

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

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

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

South Korean R&D as a percentage of GDP

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

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

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

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

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

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

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.