Agenda 2012 Instructor: Rod Biasca Welcome to the Seminar Week 4. Tracking the Economy Week 5. Economic Growth Savings & Investment Questions ? Comments?

Tracking the Macroeconomics Unit 4 BU204 Macroeconomics

Economic Growth Savings & Investment Unit 5 BU204 Macroeconomics

Long-Run Economic Growth © Worth Publishers, all rights reserved

5 Figure 9.1 Economic Growth in the United States, India, and China over the Past Century Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

6 Figure 9.2 Incomes Around the World, 2007 Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

7 Figure 9.3 Comparing Recent Growth Rates Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

8 Growth = Additional Resources + Total Productivity Increase The Main Sources of Long-Run Growth are:  Labor productivity  Physical capital  Human capital  Technology

9 Figure 9.5 Technological Progress and Productivity Growth Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers Technological Progress and Productivity Growth

10 Why Growth Rates Differ A number of factors influence differences among countries in their growth rates.  savings and investment spending,  foreign investment,  education,  infrastructure,  research and development,  as well as foster political stability, and  the protection of property rights.

11 Unnumbered Figure 9.1 Old Europe and New Technology Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

12 Figure 9.7 Success and Disappointment Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

13 Figure 9.8 Do Economies Converge? Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers Are economies converging? No!

14 of 22 LIMITS Economists generally believe that environmental degradation poses a greater problem for whether long-run economic growth is sustainable than natural resource scarcity. Addressing environmental degradation requires effective governmental intervention, but the problem of natural resource scarcity is often well handled by the market price response. The emission of greenhouse gases is clearly linked to growth, and limiting them will require some reduction in growth. However, the best available estimates suggest that a large reduction in emissions would require only a modest reduction in the growth rate.

15 Figure 9.11 Climate Change and Growth Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

Macroeconomics Savings, Investment Spending, and the Financial System © Worth Publishers, all rights reserved

17 The Savings–Investment Spending Identity in an Open Economy I = S Private + S Government + KI = NS + KI Investment spending = National savings + Capital inflow in an open economy

18 Unnumbered Figure 10.1 America’s Low Savings Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

19 Figure 10.1 The Savings–Investment Spending Identity in Open Economies: the United States and Japan, 2007 Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers Open Economies: the United States and Japan 2007

20 The Financial System Definitions  Wealth  Financial asset  Physical asset  Liability  Transaction costs  Financial risk

21 The Financial System Tasks  Reducing transaction costs  Reducing financial risk  Providing liquid assets Financial Intermediaries: Mutual funds Pension funds Life insurance companies Banks

Figure 10.4 Equilibrium in the Loanable Funds Market Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

Figure 10.6 An Increase in the Supply of Loanable Funds Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers

Figure 10.5 An Increase in the Demand for Loanable Funds Krugman and Wells: Macroeconomics, Second Edition Copyright © 2009 by Worth Publishers