Principles of Macroeconomics 3250:201

Principles of Macroeconomics3250:201

Richard W. Stratton

04/19/23 The University of Akron 2

Administration

6 graded assignments this weekHomework 07, 08, 09, 10Essay 02CBT Test 03 (Friday - Monday)

4 graded assignments next weekHomework 11, 12Essay 03CBT Test 04 (Friday - Monday)

Decision Tree

Decision Tree

Student questionsMeasuring GrowthDeterminants of Economic GrowthTheories of GrowthWorksheet 07 Economic Growth

Q8

Q15

Q11


Review Readings

Compare and discuss questions on worksheet or chapter 10write down top 5 questions for the Group

ClassDiscuss questions rotating among Groups

Decision Tree


Q8

Q15

Q11


Calculating growth rate

Calculation of Growth Rate for 2001Year Nominal GDP GDP Deflator Real GDP Growth Rate

1998 8,781.5 103.20

1999 9,274.3 104.69

2000 9,824.6 106.89

2001 10,082.2 109.42

2002 10,442.1 110.66



Step 1 – Calculate Real GDPYear Nominal GDP GDP Deflator Real GDP Growth Rate

1998 8,781.5 103.20 8,509.2

1999 9,274.3 104.69 8,858.8

2000 9,824.6 106.89 9,191.3

2001 10,082.2 109.42 9,214.2

2002 10,442.1 110.66 9,436.2



Step 2 – Calculate Growth RateYear Nominal GDP GDP Deflator Real GDP Growth Rate

1998 8,781.5 103.20 8,509.2 ---1999 9,274.3 104.69 8,858.8 8859 – 8509

8509

2000 9,824.6 106.89 9,191.3 9191 – 88598859

2001 10,082.2 109.42 9,214.2 9214 – 9191 9191

2002 10,442.1 110.66 9,436.2 9436 – 9214 9214



Step 2a – Calculate Growth RateYear Nominal GDP GDP Deflator Real GDP Growth Rate

1998 8,781.5 103.20 8,509.2 --1999 9,274.3 104.69 8,858.8 4.1%

2000 9,824.6 106.89 9,191.3 3.7%

2001 10,082.2 109.42 9,214.2 0.3%

2002 10,442.1 110.66 9,436.2 2.4%


Growth in Standard of Living

The standard of living depends on Real GDP per person

Real GDP per person = Real GDP divided by the population


Growth in Standard of Living

The growth rate of real GDP per person can be calculated by using the formula:

Growth of real GDP per person

Growth rate of real GDP

Growth rate of population– =

Growth of real GDP per person 5 percent – 1 percent = 4 percent.=

Decision Tree


Q8

Q15

Q11


Economic Growth

“… the limits to growth on this planet will be reached sometime within the next 100 years. The most probable result will be a sudden and uncontrollable decline in both population and industrial capacity.”

Comment

(The Limits to Growth, Meadows et al.; Universe, 1972)

#17


Determinants of Growth

What causes growth?

Is growth sustainable?

Assume GDP is produced using three categories of inputs – labor, capital, and raw materials.



If the number of aggregate hours of labor used increased, real GDP would ____________.

If the capital used in production increased, real GDP would ____________.

increase

increase



If the amount of raw materials used in production increased, real GDP would _____________.

If labor productivity increased and the number of aggregate hours remained the same, real GDP would _____________.

increase

increase


Graphing changes

Axes?

Real

GDP

Aggregate Hours

Aggregate Production


Graphing changes

Increase aggregate hours

Real

GDP

Aggregate Hours



Graphing changes

Increase use of capital

Real

GDP

Aggregate Hours



Graphing changes

Increase of raw materials

Real

GDP

Aggregate Hours



Graphing changes

Increase labor productivity

Real

GDP

Aggregate Hours



Extensive / Intensive Growth

Extensive and Intensive GrowthAction Intensive Extensive

Increase aggregate hours of labor X

Investment in Physical Capital (Increase use of capital)

X

Increase use of raw materials X

Increase labor productivity X

Increase total productivity X

Investment in Human Capital X

Discovery of new technologies X


Sustainable Growth

Are there limits to extensive growth?

Are there limits to intensive growth?

Decision Tree


Q8

Q15

Q11


Economic Growth

Growth Theories – Compare and contrast

Classical growth theoryNeo-classical growth theoryNew growth theory


Comparing Growth Theories

Term, Person or Concept Classical Neo-Classical New Theory

Growth rate of GDP Measured as % change in Real GDP

Measured as % change in Real GDP


Technical innovation

Labor productivity

Population growth




Growth rate of GDP Measured as % change in Real GDP



Technical innovation Random

Temp

Random HK growth R&D

Labor productivity Temp Sustainable random

Sustainable predicatable

Population growth Temp Limiting

Not limiting Women’s Choice

Not limiting Women’s Choice




Productivity growth

Wage rate for women

Death rate




Productivity growth Regresses to Subsistence

Unending growth

Unending growth

Wage rate for women Ignored Women wages & part. increase

Women wages & part. increase

Death rate Decrease with growth

Decrease with growth

Decrease with growth




Human capital investment

Investment in R & D

The role of profits




Human capital investment

Ignored Random

Unrelated to growth

Dependent on Choice

Investment in R & D Ignored Ignored Choice if profitable

The role of profits Ignored Ignored Primary driver


Sustainable Growth

Are there limits to growth?

Are there limits to extensive growth?

Are there limits to intensive growth?


Summary - Classical

Classical Growth Theory Increased productivity Increased GDP Reduced deaths and increased births Increased population Decrease in GDP per person Population growth limits increases in

human welfare


Summary - Classical

Classical – Key featuresIncreases in labor productivity are

random and temporaryChanges in birth rate and life

expectancy primary determinants of population

Increases in population limited by subsistence level


Summary - Classical

Classical Growth Theory – Prediction

Global Economy stagnates at subsistence level


Summary - Neoclassical

Neo-Classical Growth Theory Technological advances Increased labor productivity Increase GDP Reduce deaths Reduce birth rates (women’s opt. cost)

Growth rate = population growth + productivity growth + accumulation of human capital



Neo-Classical – Key featuresTechnological advances occur by

chance, but are sustainableChange in population influenced by

death rate & birth rate declinesGrowth rate = population growth +

productivity growth + accumulation of human capital



Neo-Classical – Prediction

Global Economy grows at a rate equal to technological change. National economies tend to converge.


Summary – New Theory

New Growth TheoryEducation, R&D, & profit determine

technological advances Increased labor productivity Increase GDP per person Reduce death rates Reduce birth rates (women’s opt.

cost)



New Theory – Key featuresDecisions on education, R&D, and

profit potential determine the rate of technological advance

Change in population influenced by death rate & birth rate declines

Growth rate = population growth + productivity growth + accumulation of human capital



New Theory – Prediction

National economies grow at rates dependent on incentives (save, invest, etc.)

They will not necessarily converge.

Decision Tree


Q8

Q15

Q11


Worksheet – MC questions

1. Which of the following is likely to increase the poverty in a country?

a) A decrease in population over time .

b) A decrease in the real GDP growth rate over time .

c) A decrease in the inflation rate over time.

d) An increase in the real GDP per person growth rate over time .



2. If the U.S. population grew at a 0.9 percent during 1999 and real GDP grew at a 4.4 percent during the same period, what was the growth rate of real GDP per person?

a) –3.5 percent b) 3.5 percent c) 4.0 percent d) 5.3 percent



3. Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were employed. This year real GDP is $100 million and 950,000 workers are employed. Hence, labor productivity has

a) increased.b) decreased.c) remained constant.



4. If Country A’s real GDP grows at a rate of 14 percent per year, how many years will it take for Country A’s real GDP to double ?

a) 5

b) 7

c) 10

d) 30



5. Neoclassical growth theory predicts that real GDP will

a) remain at the subsistence level .

b) grow at a rate that is determined by the pace of technological change .

c) grow but at a rate that will slow as time progresses and population growth increases.

d) continue to grow because of the choices people make in the pursuit of profit .


Worksheet – T/F questions

6. Support for structuring taxes to encourage innovation is found in neoclassical growth theory.

False – In neoclassical growth theory, innovation and technological change are assumed random. Therefore, tax policies will not increase either. Support for this policy is found in the new growth theory.


Worksheet – T/F questions

7. New growth theory predicts that national growth rates will slowly converge over time .

False – The “convergence” prediction is usually associated with the neoclassical theory of growth and the lack of evidence to support that predication was a stimulus to the development of the new theory of growth. Technically, the classical theory also predicts convergence, to subsistence levels.


Worksheet – Real GDP

8. What is the per capita real GDP growth rate of Oz?

Oz Lilliput

Real GDP growth rate 5% 3%

Population growth rate 2% 1%

5% - 2% = 3%



9. How many years will it take the real GDP per capita of Oz to double, at this rate of growth?

Oz Lilliput



70 / 3 = 23.3 years

Use the rule of 70



10. If real GDP in Oz is currently 20% larger than in Lilliput, how many years will it take Lilliput to catch up to Oz?

Oz Lilliput



Lilliput will never catch up


Worksheet – Real GDP2002 data Countr

y #1Country

#2Country

#3

Real GDP $8.444 $113.7 $133.8

Growth rate of real GDP - 0.6% 6.9% 1.6%

Real GDP per capita $30,200

$29,300 $25,800

Population 280,798

3,924,140

5,190,785

Population growth rate 0.49% 1.03% 0.14%11. Which country has the highest standard of living?



y #1Country

#2Country

#3

Real GDP $8.444 $113.7 $133.8



$29,300 $25,800

Population 280,798

3,924,140

5,190,785

Population growth rate 0.49% 1.03% 0.14%12. Which country has the fastest growing economy?


Worksheet – Real GDP 2002 data Countr

y #1Country

#2Country

#3

Real GDP $8.444 $113.7 $133.8



$29,300 $25,800

Population 280,798

3,924,140

5,190,785

Population growth rate 0.49% 1.03% 0.14%13. What is the growth rate in the standard of living in country #3?

1.6% - 0.14% = 1.46%



y (Icelan

d)

Country (Ireland

)

Country (Finland

)

Real GDP $8.444 $113.7 $133.8



$29,300 $25,800

Population 280,798

3,924,140

5,190,785

Population growth rate 0.49% 1.03% 0.14%

14. If these trends continue in country #1, what will the real GDP per capita be in 2003?

-0.6% - 0.49% = -1.09% It will be 1.09% LOWER

$30,200 – (0.0109)*$30200 = 0.9891*30200 = $29,871


Worksheet – Match the Theory

15. Growth is measured by the percentage change in real GDP

16. Technical innovation results from choices

17. Human capital investment is key to increases in labor productivity

Classical Neoclassical New Growth Theory

All three

New Growth Theory

New Growth Theory



18. Prosperity leads to decreases in death rates and increases in birth rates

19. Prosperity leads to decreases in death rates and in birth rates

20. Productivity growth is essential to increases in living standards


Classical

Neoclassical

New Growth Theory



21. The relationship between wage rates for women and birth rates is key

22. Increased productivity leads to no improvement in living standards

23. Investment in R & D increases economic growth


Classical

Neoclassical & New Growth Theory

New Growth Theory



24. The role of profits in the economy is an important component

25. Romer one of the major proponents

26. Malthus one of the major proponents


Classical

New Growth Theory

New Growth Theory

Decision Tree


Q8

Q15

Q11

Documents

Principles of Macroeconomics 3250:201