Principles of Macroeconomics 3250:201

Principles of Macroeconomics3250:201 Richard W. Stratton

Administration • 6 graded assignments this week • Homework 07, 08, 09, 10 • Essay 02 • CBT Test 03 (Friday - Monday) • 4 graded assignments next week • Homework 11, 12 • Essay 03 • CBT Test 04 (Friday - Monday) The University of Akron Decision Tree

Decision Tree Student questions Measuring Growth Determinants of Economic Growth Theories of Growth Worksheet 07 Economic Growth Q8 Q11 Q15

Review Readings • Compare and discuss questions on worksheet or chapter 10 • write down top 5 questions for the Group • Class • Discuss questions rotating among Groups The University of Akron

Calculating growth rate • Calculation of Growth Rate for 2001 The University of Akron

Calculating growth rate • Step 1 – Calculate Real GDP The University of Akron

Calculating growth rate • Step 2 – Calculate Growth Rate The University of Akron

Calculating growth rate • Step 2a – Calculate Growth Rate The University of Akron

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 The University of Akron

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. Growth in Standard of Living The growth rate of real GDP per person can be calculated by using the formula: The University of Akron

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 The University of Akron

Determinants of Growth What causes growth? Is growth sustainable? Assume GDP is produced using three categories of inputs – labor, capital, and raw materials. The University of Akron

Determinants of Growth • 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 The University of Akron

Determinants of Growth • 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 The University of Akron

Graphing changes Axes? Real GDP Aggregate Production Aggregate Hours The University of Akron

Graphing changes Increase aggregate hours Real GDP Aggregate Production Aggregate Hours The University of Akron

Graphing changes Increase use of capital Real GDP Aggregate Production Aggregate Hours The University of Akron

Graphing changes Increase of raw materials Real GDP Aggregate Production Aggregate Hours The University of Akron

Graphing changes Increase labor productivity Real GDP Aggregate Production Aggregate Hours The University of Akron

Extensive / Intensive Growth Extensive and Intensive Growth The University of Akron

Sustainable Growth • Are there limits to extensive growth? • Are there limits to intensive growth? The University of Akron

Economic Growth Growth Theories – • Compare and contrast • Classical growth theory • Neo-classical growth theory • New growth theory The University of Akron

Comparing Growth Theories The University of Akron

Sustainable Growth • Are there limits to growth? • Are there limits to extensive growth? • Are there limits to intensive growth? The University of Akron

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 The University of Akron

Summary - Classical Classical – Key features • Increases in labor productivity are random and temporary • Changes in birth rate and life expectancy primary determinants of population • Increases in population limited by subsistence level The University of Akron

Summary - Classical Classical Growth Theory – Prediction • Global Economy stagnates at subsistence level The University of Akron

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 The University of Akron

Summary - Neoclassical Neo-Classical – Key features • Technological advances occur by chance, but are sustainable • Change in population influenced by death rate & birth rate declines • Growth rate = population growth + productivity growth + accumulation of human capital The University of Akron

Summary - Neoclassical Neo-Classical – Prediction • Global Economy grows at a rate equal to technological change. National economies tend to converge. The University of Akron

Summary – New Theory New Growth Theory • Education, R&D, & profit determine technological advances  • Increased labor productivity  • Increase GDP per person  • Reduce death rates  • Reduce birth rates (women’s opt. cost) The University of Akron

Summary – New Theory New Theory – Key features • Decisions 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 The University of Akron

Summary – New Theory New Theory – Prediction • National economies grow at rates dependent on incentives (save, invest, etc.) • They will not necessarily converge. The University of Akron

Worksheet – MC questions • Which of the following is likely to increase the poverty in a country? • A decrease in population over time. • A decrease in the real GDP growth rate over time. • A decrease in the inflation rate over time. • An increase in the real GDP per person growth rate over time. The University of Akron

Worksheet – MC questions • 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? • –3.5 percent • 3.5 percent • 4.0 percent • 5.3 percent The University of Akron

Worksheet – MC questions • 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 • increased. • decreased. • remained constant. The University of Akron

Worksheet – MC questions • 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 ? • 5 • 7 • 10 • 30 The University of Akron

Worksheet – MC questions • Neoclassical growth theory predicts that real GDP will • remain at the subsistence level. • grow at a rate that is determined by the pace of technological change. • grow but at a rate that will slow as time progresses and population growth increases. • continue to grow because of the choices people make in the pursuit of profit. The University of Akron

Worksheet – T/F questions • 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. The University of Akron

Worksheet – T/F questions • 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. The University of Akron

Worksheet – Real GDP • What is the per capita real GDP growth rate of Oz? 5% - 2% = 3% The University of Akron

Principles of Macroeconomics 3250:201