1. ©2017 Jennifer P. Wissink, all rights reserved.
The End Lecture 27
Dr. Jennifer P. Wissink
©2017 Jennifer P. Wissink, all rights reserved.
November 30, 2017 1

2. Sources of Economic Growth: Technological Change & Progress
Embodied Technical Change
Technical change that results in an improvement in the quality of capital. (e.g., store cash registers then and now)
Disembodied Technical Change
Technical change that results in a change in the production process. (e.g., better organization of factory “floor”; market reforms)
Another Distinction
Invention: An advance in knowledge.
Innovation: The use of new knowledge to produce a new product or to produce an existing product more efficiently.
i>clicker question: Which one of the following would be classified as an invention?
In 1899 the Bayer Company marketed acetylsalicylic acid as a pain reliever in powder form under the name Aspirin.
In 1907 James Spangler combined an old fan motor, a soap box, a broom stick, and a pillow case into a device which was later acquired by William H. Hoover, president of the Hoover Company.
Beginning in the late 1950s, the field of nanoscience (or nanotechnology) emerged as scientists developed new techniques for the manipulation of materials billionths of a meter wide.
In 2001 Eddie Bauer and other retailers introduce stain and wrinkle resistant slacks using fabric developed by Greensboro, North Carolina based Nano-Tex, LLC. Attached to the fabric’s cotton fibers are molecular structures that create an invisible barrier that causes moisture and stains to bead on top of the fabric and prevent absorption.

3. What Causes Technological Progress? Many Say R&D
Research and Development as a Percent of GDP, 1999
The United States spends more total money than any other country on research and development.
However, when the spending is measured as a percentage of each nation’s GDP, Japan spends more.
A big part of U.S. spending on research and development is in defense-related areas.
SOURCE: National Science Foundation, National Patterns of R&D Resources, 2002, Washington D.C.

4. Can We Use Economic Analysis to Understand the Drivers of Growth in Different Countries?
India and China are the two most populous countries and have also grown very rapidly in recent years.
From 1978 to 2004, GDP in China grew at the rate of 9.3 percent per year.
From 1978 to 2004, GDP in India grew at a lower rate of 5.4 percent per year.
Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan used growth accounting to answer this question.
China’s rapid growth was caused by more rapid accumulation of physical capital and more rapid technological progress.
China invested much more in physical capital and was able to increase its technological progress at a more rapid rate.

5. Growth and the Environment and Issues of Sustainability
Many huge looming questions.
Is there climate change?
What’s causing it?
plants or plants?
Who should do what about pollution?
need to consider both consumption and production.
What kinds of institutions and societal structures can be utilized?
Kyoto types of agreements?
In 1997, the conference in Kyoto, Japan was widely considered a breakthrough, producing an international treaty to limit emissions of greenhouse gases.
What has happened beyond Kyoto?
Paris…?
Are we running out of resources?
Oil?
Fresh Water?
Farmable Land?

6. Believe It or Not…
Guido Menzio, an Italian economist from the University of Pennsylvania
Ph.D. Economics, Northwestern University Evanston, IL, 2005
Thesis: The Wage Policy of the Firm: Micro-foundations and Macro Implications
Committee Chairperson: Professor Dale T. Mortensen
Carlo Alberto Medal for Best Italian Economist Under 40, 2015
Ten ways to tell you might be sitting next to an economist
1. He refuses to listen to the safety announcement because "in the long run, we're all dead"
2. He keeps telling you that "there is no such thing" as a "complimentary refreshment service"
3. He avoids prolonged conversation with you because he has a "rational expectation" that you're an idiot since you chose the middle seat
4. But he offers to trade his aisle seat for yours in a competitive auction with the woman sitting behind you
5. He plonks his elbow on the arm rest because space has a "higher marginal utility" for him than for you
6. When he elbows you in the ribs, he says he is simply trying to "nudge" you into better behaviour
7. When he opens the overhead locker, a copy of Thomas Piketty's "Capital in the 21st century" falls out and hits you on the head
8. But then he uses the book as a footrest
9. He only relaxes when the plane reaches 35,000 feet because then it's in "general equilibrium"
10. Spends all the flight scribbling Greek letters into a notebook. Turns out it's not a series of equations; he's part of the IMF negotiating team en route to Athens
11. Adds an extra point to a "top 10 list" because he believes in "quantitative reasoning"

7. The End - Amen Study hard. Use the class web pages – stay informed.
Work loads of problems.
Eat well.
Take a walk once in a while.
Get some sleep.
Don’t survive on
And last but not least....
Thanks to YOU ALL for a great semester!!
And thanks to the TAs for all their hard work.
Best of luck on all your finals. I am looking for good things from you all in our final!!

8. Assume all capital account transactions are private.
i>clicker question: A British private citizen buys $50,000 worth of stock in IBM. Which two items in the US Balance of Payments are impacted?
(1) and (3)
(1) and (6)
(2) and (6)
(6) and (8)
(6) and (7)
i>clicker question: An American buys 1000€ worth of computer advice from a French company in Paris. Which two items in the US Balance of Payments are impacted?
(1) and (3)
(1) and (6)
(2) and (6)
(2) and (7)
(6) and (7)
i>clicker question: A French man buys $500 worth of apples from the Cornell Orchards. Which two items in the US Balance of Payments are impacted?
(1) and (3)
(1) and (6)
(2) and (6)
(1) and (7)
(6) and (7)

9. If Japan is a capital abundant country and exports AND imports a large number of automobiles every year, her trade flow in automobiles is most likely based on
a.     product differentiation
b.     the Heckscher-Ohlin theorem.
c.     the theory of comparative advantage.
d.     the theory of absolute advantage.
e.     all of the above.
The supply of foreign exchange will decrease if which of the following occurs?
a.     Demand for U.S. goods decreases overseas.
b.     The U.S. demand for imported goods decreases.
c.     The U.S. demand for imported goods increases.
d.     Demand for U.S. goods increases overseas.

10. Classical versus non-classical view of the Phillips Curve and shifters of PC

15. Suppose an economy is represented by these equations:
C = Yd and Yd = Y-T
Id = 400
G = 1,000 and T = 1,000
EX = 400
IM = 0.1Yd
Yfull employment = $5,200
Assume the economy is on the flat/horizontal part of SR-AS.
Find Y* for this economy.
At Y*, what is the value of this economy’s current account in its balance of payments?
Assuming no money market, inflation or changes in the value of the dollar relative to other currencies…Find the value of the government multiplier.
What should the fiscal guys do to use “G” to get to full employment Y?
Without using any explicit numbers, how would introducing the money market alter Y*?
Without using any explicit numbers, how would introducing market based exchange rates alter Y*?

16. Ans:
AEd = C+ Id + G + EX – IM = (Y- 1000) – 0.1(Y – 1000)
= Y
Invoke the equilibrium condition: Y* = AEd  Y* = Y*
0.5Y* = 1600  Y* = 3200
The economy’s current account is defined as exports – imports of goods and services. At Y* = 3200, the value of imports is 0.1*[ ] = 220. Hence, value of current account = 400 – 220 = There is a trade surplus.
The government multiplier, Kg = = =
Need to stimulate the economy by increasing G. ΔY*= So ΔY* = KgΔG  2000=2ΔG  ΔG= So increase G by 1000.
If there was a money market we expect some crowding out…. So, money demand increases, which drives up r, which makes Id fall, which makes AEd fall, which reduces Y* some.
Now since we have driven up r, demand for foreign exchange falls, supply of foreign exchange rises which decreases the dollar price of foreign exchange, which means the dollar gets stronger, which means imports rise and exports fall, which makes AEd fall, which reduces Y* even more.

17. Suppose an economy is represented by these equations:
C = Yd and Yd = Y-T
Id = 400 and G = 1,000 and T = 1,000 and EX = 400 and IM = 0.1Yd
Yfull employment = $5,200 and the economy is on the flat/horizontal part of SR-AS.

18. Suppose an economy is represented by these equations:
C = Yd and Yd = Y-T
Id = 400 and G = 1,000 and T = 1,000 and EX = 400 and IM = 0.1Yd
Yfull employment = $5,200 and the economy is on the flat/horizontal part of SR-AS.

19. Suppose an economy is represented by these equations:
C = Yd and Yd = Y-T
Id = 400 and G = 1,000 and T = 1,000 and EX = 400 and IM = 0.1Yd
Yfull employment = $5,200 and the economy is on the flat/horizontal part of SR-AS.