1. MACROECONOMICS UNDERSTANDING THE GLOBAL ECONOMY The Wealth of Nations The Supply Side Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.

2. 3-2 Key Concepts GDP Growth Total output Output per capita Elements of Growth Labor Capital Total Factor Productivity

3. 3-3 The Importance of Economic Growth "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." --Adam Smith

4. 3-4 GDP Growth An increase over time in the quantity of goods and services produced by an economy Rate of growth Real GDP: adjusts for inflation Real GDP per capita: adjusts for size of population

5. 3-5 World GDP Growth by Century

6. 3-6 Rise In GDP per capita by Region

7. 3-7 Relative importance of trend growth and business cycles

8. 3-8 Importance of Growth Growing population Life expectancy Improving standards of living Poverty reduction

9. 3-9 GDP per capita, US $$ Growth rate, 1980 – 2000 (per annum) Growth rate and Level of GDP

10. 3-10 GDP per capita, US $$ Growth rate, 1980 – 2000 (per annum) China India Points are weighted by size of population in 1980 Growth rate and Level of GDP

11. 3-11 World GDP per capita and Life Expectancy

12. 3-12 World Population Growth

13. 3-13 Trends in Global Inequality

14. 3-14 Trends in Global Poverty Population with income of less than $1 a day

15. 3-15 Inequality and Growth Growth Rate More Inequality 

16. 3-16 Which enhances welfare? Eliminate business cycle movements Enhance growth rate

17. 3-17 1999 GDP per capita (US = $30600) Years to attain US 1999 levelActual growth rate (1990-99) 1% growth3% growth6% growth9% growth Germany $25350 20 years7 years4 years3 years1.5% UK $22640 32 years11 years6 years4 years2.1% Brazil $4420 196 years66 years34 years23 years1.7% China $780 370 years145 years64 years44 years9.8% Ethiopia $100 577 years194 years99 years67 years2.2% Compounding is a wonderful thing…

18. 3-18 Analysis of Growth Capital (buildings, infrastructure and machines) Capital (buildings, infrastructure and machines) Total Factor Productivity (technological knowledge and efficiency) Total Factor Productivity (technological knowledge and efficiency) Output (GDP) Labor (Hours worked, number of workers) Labor (Hours worked, number of workers)

19. 3-19 GDP per capita GDP per capita = GDP Population Labor Productivity Average Hours Worked Employment Rate Labor Force Participation Rate Labor Force Participation Rate

20. 3-20 GDP per capita Labor productivity Average hours worked Employment rate = 1 – Unemployment Rate Labor force participation rate

21. 3-21 US Population by Labor Market Status (2011)

22. 3-22 Decomposition of GDP per capita (2008)

23. 3-23 Total Employment

24. 3-24 Average Annual Hours Worked

25. 3-25 Role of Inputs More inputs means more output Diminishing returns 1 worker = $10 in output 2 workers = $18 in output 3 workers = $24 in output Marginal return is $8 in output Marginal return is $6 in output

26. 3-26 The Production Function

27. 3-27 Production Function Output = TFP  Capital Stock a  Labor Hours (1-a) Real GDP Total Factor Productivity A parameter (a number, 0 < a < 1)

28. 3-28 Cobb-Douglas example Real GDP Hours worked TFP = 1 Capital = 500 a=0.6

29. 3-29 Hours Worked Real GDP

30. 3-30 Capital Stock Output

31. 3-31 Implications for labor productivity Output = TFP  Capital Stock a  Labor Hours (1-a) Labor Productivity

32. 3-32 Changes in Labor Productivity Total Factor Productivity Capital per Labor Hour

33. 3-33 Capital Stock per labor hour Labor Productivity 5001000 8 12 Labor Productivity = TFP  (Capital Stock/Labor Hours) a

34. 3-34 Output Growth and

35. 3-35 Capital Stock per Labor Hour Labor Productivity k1k1 y1y1 y2y2 Output/Labor Hour = TFP  (Capital/Labor Hour) a Increase in TFP

36. 3-36 Growth in Output Increase in labor supply May have no impact on GDP per capita Not sustainable Increase in capital stock Must increase at faster rate than labor Increase in TFP No diminishing returns in this framework

37. 3-37 Growth accounting for Japan, Germany, the UK, and the United States, 1913–1950.

38. 3-38 Growth accounting for Japan, Germany, the UK, and the United States, 1950–1985.

39. 3-39 Growth accounting for Japan, Germany, the UK, and the United States, 1985–2008.

40. 3-40 Growth Accounting Asian Tigers, 1966 - 1990

41. 3-41 Europe and Asia Total Output:Of Which CapitalLaborTFP Golden Age 1950-73 France5.0%1.6%0.3%3.1% UK3.0%1.6%0.2%1.2% W. Germany6.0%2.2%0.5%3.3% Asian Miracle 1960-94 China6.8%2.3%1.9%2.6% Hong Kong7.3%2.8%2.1%2.4% Indonesia5.6%2.9%1.9%0.8% Korea8.3%4.3%2.5%1.5% Thailand7.5%3.7%2.0%1.8% Singapore8.5%4.4%2.2%1.5% Europe relied on capital and TFP – Asian countries have relied on capital

42. 3-42 Growth Accounting Japan Capital growth important through out Labor, TFP important ’50 – ’85 US TFP important until ’85 Labor important after ’85 UK and Germany rely less on labor

43. 3-43 Growth accounting in the BRIC Economies.

44. 3-44 Summary Importance of Growth Sources of Growth GDP per capita Hourly productivity Number of hours worked Productivity Capital Accumulation TFP Growth Accounting Copyright © 2012 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.