1 ECONOMICS 3150B Fall 2015 Professor Lazar Office: N205J, Schulich

2 Lecture 16: November 10 Ch. 6-8

3 Economic Growth Long-term growth: –Growth in availability and use of factors of production Investment decisions Immigration policies Labor force participation –Improvements in quality of factors of production (human capital, technology) –Improvements in efficiency in use of factors of production (management, organizational structure and incentives) –New/better products, new production technologies, new ways of doing business –Changes in composition of production, with shifts towards sectors with above average levels of productivity (output per unit of input) –Improvements in competitiveness of domestic firms – higher profits (increase returns on capital)

4 Productivity Productivity growth depends on innovativeness and competitiveness of domestic firms – competitive strategies and creation of competitive advantage –Innovation: developing and successfully introducing new products, new production processes, organizational structures, distribution networks, etc. –Enhanced competitiveness resulting from adopting new production processes, new logistic arrangements, distribution networks, etc. Successful competitive strategies (cost, differentiation, niche) result in productivity gains –Cause-effect: development and execution of strategies enhances competitive position, producing measured productivity gains

5 Largest Companies by Sales, 2104 Aerospace & Defense –Boeing (US) –EADS (France) –Lockheed Martin (US) –General Dynamics (US) –BAE Systems (UK) –Northrop Grumman (US) –Raytheon (US) –Rolls-Royce Holdings (UK) –Bombardier (Canada) –Safran (France)

6 Largest Companies by Sales, 2104 Apparel & accessories –Christian Dior (France) –Nike (US) –Adidas (Germany) –Kering (France) –VF (US) –Swatch (Switzerland) –Chow Tai Fook Jewellery (Hong Kong)

7 Largest Companies by Sales, 2104 Auto & truck parts –Continental (Germany) –Johnson Controls (US) –Denso (Japan) –Magna (Canada) –Bridgestone (Japan) –Hyundai Mobis (South Korea) –Aisin Seiki (Japan) –Michelin (France) –Sumitomo Electric (Japan) –Toyota Industries (Japan)

8 Largest Companies by Sales, 2104 Computer hardware –Apple (US) –HP (US) –Fujitsu (Japan) –Lenovo (China) –Quanta Computer (Taiwan) –Compal Electronics (Taiwan) –Wistron (Taiwan) –Asustek Computer (Taiwan) –Inventec (Taiwan) –Innolux (Taiwan)

9 Largest Companies by Sales, 2104 Consumer Electronics –Sony (Japan) –Panasonic (Japan) –LG Electronics (South Korea) –Sharp (Japan) –Fujifilm (Japan) –TCL (China) –Konica Minolta (Japan)

10 Largest Companies by Sales, 2104 Diversified chemicals –BASF (Germany) –Dow Chemical (US) –Bayer (Germany) –Saudi Basic Industries (Saudi Arabia) –Lyondell Basell (Netherlands) –DuPont (US) –Mitsubishi Chemical (Japan) –Linde (Germany) Sumitomo Chemical (Japan) –Akzo Nobel (Netherlands)

11 Largest Companies by Sales, 2104 Iron & steel –Arcelor Mittal (Luxembourg) –Posco (South Korea) –Nippon Steel & Sumitomo Metal (Japan) –Citic Pacific (Hong Kong) –Vale (Brazil) –JFE (Japan) –Baoshan Iron & Steel (China) –Tata Steel (india) –Nucor (US) –Metalurgica Gerdau (Brazil)

12 Largest Companies by Sales, 2104 Pharmaceuticals –McKesson (US) –AmerisourceBergen (US) –Cardinal Health (US) –Novartis (Switzerland) –Roche (Switzerland) –Pfizer (US) –Sanofi (France) –Merck (US) –GlaxoSmithKline (UK) –Sinpharm (China)

13 Largest Companies by Sales, 2104 Semiconductors –Samsung Electronics (South Korea) –Intel (US) –Qualcomm (US) –Taiwan Semiconductor (Taiwan) –Micron Technology (US) –SK Hynix (South Korea) –Texas Instruments (US) –Applied Materials (US)

14 Productivity “Luddite” Paradox: real labor compensation depends upon growth in labor productivity, but in short run with no increase in aggregate demand, growth in labor productivity translates into decrease in demand for labor –Productivity growth enhances competitive position of companies and so enables them to increase market share, value added (profit margin) –Productivity growth increases demand by increasing global market share –In absence of productivity growth, competitive positions of companies and country decline, and so either real income levels must decline to offset reduced competitiveness, or market shares decline and so too do demand and employment Higher productivity growth rates do not have to result in lower employment

Contributions to GDP Growth GDPLaborCapitalMulti-factor productivity Canada2.6%1.2%1.1%0.4% Australia France Germany Ireland Italy Japan Portugal Spain Sweden UK US

Unemployment UR 1995 UR 2008 Multi-factor productivity Canada9.5%6.1%0.4% Australia France Germany Ireland Italy Japan Portugal Spain Sweden UK US

17 Tariffs Tax on imports (ad valorem vs. per unit) Increases the relative price of the imported good within a country in comparison to the international traded prices –Relative prices in international market: {P1/P2} –Relative prices in country A (A imports Y2): {P1/[(1+  )P2]} Ignores possible effects on terms of trade –Reduces demand for Y2  if A a large country, P2 decreases so part of tariff paid by foreign producers (improvement in terms of trade); if A small country, world prices unaffected, so tariff paid by domestic consumers –Increase in D for X2 (factor used more intensively in production of Y2) in A   production of Y2 in A and  production of Y1 (because of change in relative prices in A) –Country B prefers to impose export tax (  %): generates same effects on relative prices but revenues collected by foreign country

18 Export Subsidy Negative tax on exports (ad valorem vs. per unit) – auto bailouts Decreases the relative cost of the exported good –Relative prices in international market: {P1/P2}  if unchanged,  profits in production of export product (Y1 for country A) Relative prices facing exporters in country A: {[P1(1+  )]/P2} Ignores possible effects on terms of trade –Increases S of Y1  if A a large country, P1 decreases so importers in country B benefit (decline in terms of trade); if A small country, world prices unaffected –Increase in D for X1 (factor used more intensively in production of Y1) in A   production of Y1 in A and  production of Y2 (because of change in relative prices in A) –Distortions created by need to raise tax revenues – tax systems creates distortions in decision-making and consumes resources  lowers PPF in A (efficiency losses)

19 Export Subsidy Regional Jets (RJs): Canada vs. Brazil Large Jets: Boeing vs. Airbus Why has Canada (US) attacked Brazil’s (EU’s) subsidization of Embraer (Airbus) and production of RJs (A380s and A350s)? –Canada (US) an exporter, not an importer –Deterioration in terms of trade –Regional income effects since Bombardier a Quebec-based company Why does Brazil (EU) provide export subsidies which reduce relative prices of RJs (wide-body jets)?

20 New Trade Theory Economies of Scale External economies of scale – clustering effects –Productivity levels within each firm depends on size of industry – min. AC depends upon size of industry –Compatible with perfect competition –Specialized suppliers – feasible with larger market of customers –Labor market pooling – multiple employment opportunities reduce unemployment risks for labor with specialized skills, increase availability of such workers –Knowledge spillovers – informal diffusion through personal contacts –Spiky world – first mover advantage

21 New Trade Theory Economies of Scale Internal economies of scale – production, distribution, R&D –Productivity levels within each firm depend upon size of each firm –Learning curves – dynamic increasing returns –Economies of scale stem from selection of production technology Information re. available technologies R&D to generate new technologies –Not compatible with perfect competition

22 Economies of Scale: Imperfect Competition Internal economies of scale Natural monopoly case –Pricing: P > MC –X-inefficiency  incentives for senior management Oligopoly case –Minimum efficient scale of operations (MES) –Interaction between size of market and MES determines number of firms –P > MC  depending on oligopoly model (Cournot, Stackelberg, Bertrand, game theory – fixed end-point, repeated, indefinite end-point)

23 Models of Imperfect Competition Profit Maximization Monopoly Oligopoly – interdependence –Cournot model: output competition  P > MC –Bertrand model: price competition  P = MC –Prisoners’ dilemma  P = MC –Repeated version of P.D. Fixed endpoint  P = MC Indefinite endpoint  P > MC

24 External Economies of Scale Small country-large country model Assumptions: –Two countries: A (small country); B (large country) –Two factors of production –Two products –Same tastes –Same production technologies –Same relative availabilities –Y1: external economies of scale –Y2: constant returns to scale

25 External Economies of Scale  i : unit cost (AC) for product i [  1 ] A > [  1 ] B [  2 ] A = [  2 ] B Perfect competition: P = AC (zero economic profits) –P i =  i  {P1/P2} A > {P1/P2} B Country B has comparative advantage in Y1, country A in Y2 –Large country will produce Y1 to fully exploit economies of scale Industry 1 expands in country with initial cost advantage (B) and contracts in the other (A) –Gains from trade result from expansion of industry with external economies of scale

26 External Economies of Scale What determines pattern of specialization and trade in industries with external economies? Historical contingency –Something gives particular location an initial advantage in particular industry and advantage gets “locked in” by external economies of scale –Can be reinforced by dynamic learning curve – first country moves down learning curve before another country enters industry and achieves advantage even if second country can achieve lower costs all along learning curve