ECN202: Macroeconomics

1. ECN202: Macroeconomics 1980s: Economic Growth nations "justify their existence, in large part, by securing their citizens' well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment,"

2. A Divided World "key global problem of the final years of the twentieth century: unbalanced wealth and resources, unbalanced demographic trends, and the relationship between them....we are heading into the twenty-first century in a world consisting of the most part of a relatively small number of rich, satiated, demographically stagnant societies and a large number of poverty-stricken, resource-depleted nations whose populations are doubling every twenty five years or less.” How did this happen because it was not always this way? In this unit we will look at the topic of economic growth since it is responsible for this divided world. We’ll start with a few headlines and then look at some graphs that capture the essence of the problem and then we’ll look more closely at the process of economic growth to see what separates the winners from the losers.

3. In the news “The wrong way to grow” “Are world income converging?” “Why nations fail; The origins of power, prosperity and poverty” “Growth tends to slow when GDP per head reaches a certain threshold. China is getting close” “Crony capitalism comes home” “How Jack Frost separates rich, poor” “Geography is destiny” ”To sustain growth, the world needs to save more” “Is oil wealth a blessing or a curse?” “Which came first – democracy or growth?”

4. The haves The have nots Pop GDP GDP

5. The haves The have nots

6. It was not always this way

7. Shared poverty

8. We get separation

9. A shift in the balance of power China& India

10. Economic Growth: The Long View

11. How did it happen?

12. Small differences matter in long-run In 60 years here is what $1,000 grows to @ 1% = $1,800 2% = $3,200 3% = $5,900

13. Annual growth rates picked up after the industrial revolution in the 1700s

14. Why does this look different from the previous graph?

15. What caused the separation? Collapse of China “The world history of technology is the story of a long, protracted inversion. As late as the end of the fist millennium of our era, the civilizations of Asia were well ahead of Europe in wealth and knowledge. The Europe of what we call the Middle Ages (say, tenth century) had regressed from the power and pomp of Greece and Rome, had lost much of the science it had once possessed, and seen its economy retreat into generalized autarky…. Five hundred years later the tables had turned.”

16. What caused the separation? Collapse of the Middle East “A millennium ago, around roughly the tenth century, the Middle East was an economically advanced region of the world, as measured by standard of living, technology, agricultural productivity, literacy or institutional creativity.  Only China might have been more developed. …By the nineteenth century, the entire Middle East was clearly “underdeveloped” relative to western Europe and its offshoots in the new world; and by the twenty-first century it had fallen markedly behind parts of the Far East as well.” 

17. Is economic growth progress?

18. Growth is good!! "states justify their existence, in large part, by securing their citizens' well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment." Gaddis, "Living in Candlestick Park." The Atlantic Monthly April 1999 p 67 "Another set of arguments [for economic growth] is political —having to do with the claim that economic [growth] engenders greater political stability and reduced potential for conflict." Lawrence Summers in "Reflections on managing global integration“ "The success or failure of any country over the next thirty years hinges on growth." Hamish McRae, The World in 2020

19. "Historically, the biggest constraints on growth have come mainly from three sources: political conflict rooted in a clash of interests or ideologies; social stress arising from economic disparities that produce misery amid wealth; and, finally, and increasingly in the future, ecological constraints on growth.“ “It is time to understand the environment for what it is: the national-security issue of the early twenty-first century.”Robert Kaplan, “The Coming Anarchy” Growth is “not so” good!!!

20. China This is what is behind the economic growth US India

21. Features of growth: Post WW II • Dramatic swing in transitional economies after fall of communism.

22. Real GDP average growth rate IMF

23. Features of growth: Post WW II 2. Decline of Africa.

24. Real GDP average growth rate IMF

25. Features of growth: Post WW II 3. Volatility of Middle East

26. Real GDP average growth rate IMF

27. Features of growth: Post WW II 4. Slow growth of developed (rich) world

28. Real GDP average growth rate IMF

29. Features of growth: Post WW II 5. Emergence of Asia  

30. Real GDP average growth rate IMF

31. Features of growth: Post WW II 6. Center of growth in Asia changed

34. Check this out carefully because it is amazing what has happened. Look at how many in China have been lifted above abject poverty.

35. Features of growth: Post WW II 7. Widespread slowdown in growth after 1973 when OPEC "shocked" the world

36. Maddison

37. Maddison

38. Growth slowdown after 1973 (GDP annual rates of change)

39. Decomposition of growth: The theory From your work with production possibility curves you know that growth can come from two sources: you can throw more resources at the problem or you can get more efficient. It turns out it makes a big difference where that growth comes from. If it comes from more resources, eventually there may not be additional resources. For example, in the US the movement of women out from the homes and into the labor force increased resources that added to national output. The problem is eventually the participation of women will equal men and there will be no surplus of women to mobilize. The same thing is true in China where the high growth rates come from the movement of people into factories, but once the move is over, growth will slow. Productivity growth, however, is sustainable so growth can continue indefinitely if it comes from this source. Now let’s look at the decomposition in an equation and then look at the situation in the US where two demographic shocks have affected the composition of growth.

40. Decomposition of growth: The theory Growth rate version (y/p) = (y/l) +(l/p) • (y/p) = growth rate of GDP per person • (y/l) = growth rate in labor productivity (intensive growth = more productive) • (l/p) = growth rate in labor’s share of the population (extensive growth = more resources) Work smarter Work harder

41. Shock 1: Women enter labor force

43. Source: UN Medium Variant Projections, World Population Prospects: The 2008 Revision

45. Decomposition of growth: The reality (US) The demographic SHOCKS • Labor force participation rates • Baby boomers Impact – change in composition – after 1973: more from extensive growth

46. Economic Growth Theory: How Does It Happen? • Classical model (depressing) • Malthus (dismal science) • Neoclassical model (encouraging) • Inputs & productivity • Physical and human capital

47. Factors Affecting Economic Growth • Location (Guns, Germs & Steel)

48. Determinants of growth: Location "distance from the equator is the single strongest predictor of long-term economic success...“ Sachs Jared Diamond, Guns, Germs, and Steel,

49. Can you identify the rich and poor countries and do you see a pattern?

50. Factors Affecting Economic Growth 2. Structural change • Cost disease of service sector