layout: true background-image: url(figs/tcb-logo.png) background-position: bottom right background-attachment: fixed; background-origin: content-box; background-size: 10% --- class: title-slide .row[ .col-7[ .title[ # Principles of Macroeconomics ] .subtitle[Growth] .author[ ### Dennis A.V. Dittrich ] .affiliation[ ] ] .col-5[ ] ] --- ## GDP per Capita varies enormously among Nations .col-8[ ![](img03/gdpnations.png) ] --- # Wealth and Health go Together ![](fig03/unnamed-chunk-1-1.png)<!-- --> Also watch: http://www.ted.com/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen.html --- # Everyone Used to be Poor ![](img03/gdptrend.png) --- class: practice-slide # 1. .col-8[ If "everyone used to be poor," then how could some ancient civilizations afford to create massive buildings like the pyramids of Egypt and the Buddhist statues of Afghanistan (sadly, many of the latter were destroyed by the Taliban in the 1990s)? ] ??? If a single government can tax many poor people, it can build monuments, especially those requiring lots of labor, which is usually cheap in poor countries. So a large country might build a few major, awe-inspiring projects. What needs to be explained is not why some countries in the past had the wealth to build monuments, but why they were countries in the first place—how could a single government rule a large territory such as China or Egypt, for example? Notice that these famous projects are actually quite few and far between: Despite thousands of years of history and millions of premodern humans, only a few hundred places around the world have such monuments, which suggests the difficulty of ruling and taxing large numbers of people in premodern history. --- class: practice-slide # 2. .col-8[ What is growth in living standards? What is economic growth? ] ??? Living standards growth means improvements in people’s diet, housing, medical attention, education, working conditions and access to care, transportation communication entertainment and the like, that can allow people to have long and enjoyable lives and have the opportunity to accomplish the things that give their life meaning. It is not the same as economic growth, which refers only to growth in production (gross domestic product). --- ## Growth and the Economy's Potential Output .row[ .col-3[ Production Function ![](img03/cut2602.jpg) Growth can be shown by a shift in the production function ] .col-3[ Production Possibility Frontier ![](img03/cut2601.jpg) Growth is an increase in potential output ] .col-6[ * **Potential output** is the highest amount of output an economy can produce from existing production processes and resources * **Productivity** is output per unit of input * The **long-run** growth focus is on how to increase potential output * Say's Law is that supply creates its own demand * The **short-run** focus is on how to get the economy operating at its potential ]] --- # Per Capita Growth .col-7[ .row[ * Per capita output is total output divided by total population * Per capita growth means the country is producing more goods and services per person `$$\text{Per capita growth} = \%\Delta \text{in output} - \%\Delta \text{in population}$$` * Some suggest that median income is a better measure because it takes into account how income is distributed * Growth in income improves average living standards ] .row[ * Because of compounding, long-term growth rates can make huge differences * The rule of 72 states: The number of years to double income = 72/ growth rate ] ] --- # Markets, Specialization, and Growth .col-7[ Markets, specialization, and the division of labor increase productivity and growth * **Specialization** is the concentration of individuals on certain aspects of production * **Division of labor** is the splitting up of a task to allow for specialization of production * Markets may seem unfair because of the effect that they have on the distribution of income * Even though growth isn't evenly distributed, it generally raises the incomes of the poor ] --- class: practice-slide # 3. .col-8[ UK income per person today is roughly four times what is was a century ago. Many other countries have also experienced significant growth over that period. What are some specific ways in which your standard of living is likely to differ from that of your great-grandparents? ] ??? --- # Cost of Goods in Hours of Work .row[.col-8[ <img src="img03/2601.jpg" width="100%" /> ] .col-4[ Growth has reduced the number of hours the average person needs to work to buy consumer goods ]] --- ## There are Growth Miracles and Growth Disasters .row[ .col-8[ ![](img03/growthdisaster.png) ] .col-4[ # 4. The average person in Argentina today is about as rich (in inflation-adjusted terms) as his or her parents. How can this be called a “growth disaster?” ]] ??? This is a disaster because the average country has had rising living standards in the last century. Argentina has been “treading water,” while most others were “swimming ahead.” Wasted potential is itself a disaster. --- class: practice-slide # 5. .col-8[ Consider two countries, A and B, and suppose that both have identical physical endowments of, say, iron ore. But suppose that in country A, any profits that are made from mining the ore are subject to confiscation by the government, while in country B, there is no such risk. How does the risk of expropriation affect the economic endowment of the two nations? In which nation are people richer? ] ??? --- # Sources of Growth Economists identify five important sources of growth: 1. Growth-compatible institutions 2. Capital accumulation -- investment in productive capacity 3. Available resources 4. Technological development 5. Entrepreneurship --- class: practice-slide # 6. .col-8[ During the Great Leap Forward, millions of Chinese starved to death because not enough food was produced by farmers. Why didn’t farmers grow food? In particular, was it because there wasn’t enough human capital or physical capital? ] ??? This was a free rider problem: Farmers knew that whether they worked hard in the fields or not, they were paid the same. Therefore, work effort was very low and little food was produced, even though there was enough human and physical capital to supply plenty of food. --- # Growth-Compatible Institutions .col-7[ * Property rights * Informal property rights limit borrowing by the poor, and hence limit growth * When individuals get much of the gains of growth themselves, they work harder * Competitive and open markets * Markets and private ownership of property foster economic growth * Corporations are growth-compatible institutions because of limited liability, which gives stockholders an incentive to invest their savings in large enterprises * Honest Government * A dependable legal system * Political stability ] --- ## Corruption and Growth do not go together ![](fig03/unnamed-chunk-3-1.png)<!-- --> The higher the perceived corruption, the lower the GDP per capita --- class: practice-slide # 7. .col-8[ International data show a positive correlation between political stability and economic growth. 1. Through what mechanism could political stability lead to strong economic growth? 2. Through what mechanism could economic growth lead to political stability? ] ??? --- class: practice-slide # 8. .col-8[ Communists believed that their system would be much more efficient than capitalism: They thought that competition between companies was wasteful. Why build three separate headquarters for carmakers (General Motors, Chrysler, and Ford), when you can just build one? Why have three advertising budgets? Why pay for three CEOs? Why not put all the factories together, so that the same engineers can fix problems at all of the plants? Doesn’t one large firm maximize economies of scale? These are all good questions. So why do you think Communism turned out to be such a disaster, when it sounded like it would be so efficient? ] ??? Essentially, the benefits of competition were worth the cost of building a lot of separate corporate headquarters. Businesses can easily get quite lazy about cutting costs if there are no serious competition. Imagine what would happen to the level of athleticism if there was just one basketball team. Competition gives firms an incentive to work hard to cut costs, freeing up resources (such as workers and machines) to be used elsewhere in society. This force isn’t at work in a Communist system. --- class: reflection-slide # Food for Thought .col-8[ If the crucial factor determining a country's low standard of living is the adverse set of legal an cultural institutions it possesses, can you offer suggestions for how the other nations of the world might help in permanently raising that country's standard of living? You may want to watch Paul Romer's TED talk "Why the world needs ..." http://www.ted.com/talks/paul_romer.html ] --- class: practice-slide # 9. What is “capital”? --- class: practice-slide # 10. .col-8[ Economists use the term “human capital” to refer to education and job skills. How is education like a piece of capital? ] ??? Both involve delayed gratification: When you buy physical capital, you pay up-front for a machine that will give you benefits in the future. Similarly, you go to school now, paying tuition and giving up job income, in order to earn more money later. --- # Investment and Accumulated Capital .col-7[ * Although capital is a key element in growth, capital accumulation does not necessarily lead to growth * Capital may become obsolete * Capital is much more than physical machines & includes: * **Human capital** are skills that workers gain from experience, education, and on-the-job training * **Social capital** is the habitual way of doing things that guides people in how they approach production ] --- # Available Resources .col-7[ * The growth in the U.S. in the 20th century was due in part to its large supply of natural resources * What is a resource depends on the production processes of an economy and technology * New technology can overcome a lack of resources * Greater participation in the market may increase the labor force participation rate ] --- class: practice-slide # 11 .col-8[ a. Which one of the three factors of production do you think matters most to a leader of a resource-rich country? Why? b. Which one of the five key institutions do you think matters most to a leader of a resource-rich republic? Why? (Note: Does this help explain what you see happening in many resource-rich countries?) ] ??? a. The leader needs physical capital (machines and equipment) to pull the resources out of the ground. But as long as a handful of foreign workers can run the machines, the leader does not need his or her population to have much human capital. Indeed, an educated and informed population may be against the leader’s interest in staying in power. b. Political stability is most important: The leader wants to be around for a long time to collect the resource wealth. --- # Technological Development .col-7[ * Technology is the way we make goods and supply services * Changes in technology and changes in the goods and services we buy fuel growth * Advances in technology shift the production possibility curve outward by making workers more productive * Important developments in biotechnology, computers, and communications have helped fuel U.S. growth ] --- # Entrepreneurship .col-7[ * Entrepreneurship is the ability to get things done using creativity, vision, willingness to accept risk, and a talent for translating vision into reality * Entrepreneurs have been central to growth in the U.S. * Examples of American entrepreneurs include: * Thomas Edison -- generation and use of electricity * Henry Ford -- automobile production * Bill Gates -- computers and software ] --- class: practice-slide # 12. What causes economic growth? --- .row[ .col-6[ ## What Causes ## GDP Growth? Sources of Real GDP Growth ![](img03/2603.jpg) ] .col-6[ ![](img03/growthcauses.png) ] ]