MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT

1. MACROECONOMICSAND THE GLOBAL BUSINESS ENVIRONMENT The Wealth of Nations The Supply Side

2. Key Concepts • Economic Growth • Total output (GDP) Growth • Importance of Trend Growth • Output per capita growth • Elements of Growth • Labor • Capital • Total Factor Productivity

3. Economic Growth • Economic Growth: an increase over time in the quantity of goods and services produced by an economy • Rate of economic growth • Real GDP: adjusts for inflation • Real GDP per capita: adjusts for size of population • Why do we care about economic growth? • Affects human welfare • A little increase in growth over a long period makes a huge difference • Trend growth more important than business cycle

4. The Importance of Economic Growth Business Cycles still occur, but trend is key difference

5. The Importance of Economic Growth • Is higher trend growth possible? • Thomas Malthus (1798): No • finite resources => limit to both economic and population growth (i.e. more people, less economic growth) • “Malthusian Perspective” • Economist Perspective- “Half a Billion Americans?”(8/22/02 ): Yes • More people, more economic growth • How do we reconcile different views on growth? • What view does the empirical evidence support?

6. The Importance of Economic Growth

7. The Evidence

8. The Evidence

9. The Evidence

10. The Evidence

11. The Evidence

12. The Evidence Real Per Capita GDP

13. The Evidence • Evidence does suggest higher trend growth possible for many countries • Evidence also indicates that wide range of growth rates for many countries • Why the difference? • Why do some countries take off when others do not? • Again, important question since even a little difference over a long time makes a big impact

14. Benefits of Economic Growth • Growing population • Sustain more people • Life expectancy • Longer lives, more accomplishments • Improved standards of living • Higher income levels, afford more leisure • Poverty reduction • A function of both inequality and economic growth • Recent emphasis on increasing growth • Inequality may not change

15. Inequality and Growth More Inequality  Growth Rate

16. 2004 Real Per Capita GDP (PPP)

17. Explaining Differences in GDP per capita GDP GDP per capita = Population Labor Productivity Labor Force Participation Rate Employment Rate Average Hours Worked

18. Explaining Differences in GDP per capita (2001) GDP per capita • U.S. success more than labor productivity: avg. hours worked, employment rate, & participation rate important • Two policy implications: focus on factors that (1) boost labor productivity and (2) increase labor market flexibility • However, only increases in labor productivity can produced sustained increased in GDP per capita

19. Marginal return is $8 in output Marginal return is $6 in output 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

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

21. Production Function Output = TFP  Capital Stocka Labor Hours(1-a) A parameter (a number, 0 < a < 1) Real GDP Total Factor Productivity • Total factor productivity (TFP) measures how effectively the inputs are • turned into output • True impact of capital and labor depend on their marginal product: • how much output will the next additional input add to output • diminishing marginal returns: holding other inputs and TFP fixed, the • marginal product of an input increases at a decreasing rate

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

23. Real GDP Hours Worked

24. Output Capital Stock

25. Implications for labor productivity Output = TFP  Capital Stocka Labor Hours(1-a) Labor Productivity Changes in Labor Productivity (1) Total Factor Productivity (2) Capital per Labor Hour

26. Implications for Labor Productivity implies…

27. Labor Productivity = TFP  (Capital Stock/Labor Hours)a 12 Labor Productivity 8 500 1000 Capital Stock per labor hour

28. Increase in TFP Output/Labor Hour = TFP  (Capital/Labor Hour)a Labor Productivity y2 y1 k1 Capital Stock per Labor Hour

31. U.S. Labor Productivity Decomposition

32. Growth in Output • Increase in labor supply • May have no impact on GDP per capita • Not sustainable • Diminishing returns • Increase in capital stock • Must increase at faster rate than labor & depreciation • Diminishing returns • Increase in TFP • No diminishing returns in this framework • Intensive vs. extensive economic growth • More of the same growth vs. more growth with less resources

33. Growth Accounting Production Function Take the logarithms, and then changes in the logarithms %∆ Output = %∆TFP + a x %∆Capital Stock + (1-a) x %∆ Labor Hours • Steps • Find percent change in capital stock and labor inputs multiplied by their weights • Find percent change in output • Difference between two or the residual is the percent change in total factor productivity

34. Growth accounting for Japan, Germany, the UK, and the United States, 1913–1950.

35. Growth accounting for Japan, Germany, the UK, and the United States, 1950–1973.

36. Growth accounting for Japan, Germany, the UK, and the United States, 1973–1992.

37. Total Output: Of Which Capital Labor TFP Golden Age 1950-73 France 5.0% 1.6% 0.3% 3.1% UK 3.0% 1.6% 0.2% 1.2% W. Germany 6.0% 2.2% 0.5% 3.3% Asian Miracle 1960-94 China 6.8% 2.3% 1.9% 2.6% Hong Kong 7.3% 2.8% 2.1% 2.4% Indonesia 5.6% 2.9% 1.9% 0.8% Korea 8.3% 4.3% 2.5% 1.5% Thailand 7.5% 3.7% 2.0% 1.8% Singapore 8.5% 4.4% 2.2% 1.5% Europe and Asia Europe relied on capital and TFP – Asian countries have relied on capital

38. Growth Accounting • Japan • Capital growth important through out • Labor, TFP important ’50 – ’73 • US • TFP important until ’73 • Labor important after ’73 thru mid 1990s • Productivity strengthens in mid1990s • UK and Germany rely less on labor

39. Growth AccountingAsian Tigers, 1966 - 1990

40. China vs. India 1993-2004

41. Growth accounting in emerging markets, 1960–1994.

42. Summary • Importance of Growth • Sources of Growth • GDP per capita • Hourly productivity • Number of hours worked • Productivity • Capital Accumulation • TFP • Growth Accounting