WON: Introduction and Plan

1. WON: Introduction and Plan pci (per capita income)= total product/ total population Replacing Smith’s ratio (# of useful people/ # not useful) With the currently used ratio (employment/population): Pci=(total product/employment)(employment/population) productivity employment ratio Differences in pci stem from the former as higher pci countries have in Smith’s view had lower employment ratios.

2. Smith: sources of growth Ch1’s three sources Skill or dexterity Set up time Specialized machinery By the end of Ch1 we see that the division of labor (specialization) occurs at level of: Individuals/firms/industries/nations/the globe

3. Smith: DoL and EoM Greater DoL lowers transport costs DoL EoM Larger markets allow larger firms and Specialization of firms

4. Modern Growth Accounting • %Change Y=(SL)*%Change L + (Sk)*%Change K + Technical Change • Where SL is the share of Wages and Benefits in National Income • Where SK is the share of Interest and Profits (and Rent) in National Income

5. Technical Change is found as a residual • %Change Y=(SL)*%Change L + (Sk)*%Change K + Technical Change • Technical Change= %Change Y-(SL)*%Change L -(Sk)*%Change K

6. USA Numbers 1960-85 Labor share=0.67, Capital share=0.33 %change Y = 3.1% per year % change K = 3.2% (0.33x3.2 = 1.1) % change L = 1.9% (0.67x1.9 = 1.3) % change Technology = %chgY - 0.33 %chgK - 0.67 %chgL 0.7 = 3.1 - 1.1 - 1.3 So technology is a big contributor to economic growth. Smith regards trade as a key component of technical change. http://pages.stern.nyu.edu/~nroubini/NOTES/HAND4.HTM Nouriel Roubini Understanding the World Macroeconomy Handout for Chapter 4:Productivity and Growth 

7. Digression On Growth Accounting • Firms usually hire workers just up to the point where the last worker hired produces as much output as that last worker costs in wages and benefits (W). So ΔY/ΔL=W W Marginal Product of Labor MPL or ΔY/ΔL L

8. Suppose there is no technical change and the only factors are L and K.

10. If there is some technical change (R) as well:

11. USA 1960-85 Example Again Labor share=0.67, Capital share=0.33 %change Y = 3.1% per year % change K = 3.2% (note 0.33x3.2 = 1.1) % change L = 1.9% (note 0.67x1.9 = 1.3) % change Technology = %chgY - 0.33 %chgK - 0.67 %chgL 0.7 = 3.1 - 1.1 - 1.3 Growth from labor = 1.1 Growth from capital = 1.3 Growth from technological change = 0.7

12. Figure 1.5b: Growth in World Merchandise Trade & Output, 1950-1996 12 World merchandise exports 10 World merchandise output 8 6 4 2 0 -2 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

13. Figure 1.8: Regional Flows of Merchandise Trade, 1996($ Billions) 680 218 Asia 80 212 218 302 1558 154 North America Western Europe 297 173 39 96 18 5115 35 125 61 113 60 62 21 33 112 Latin America Middle East Africa Europe CIS 53 56

14. http://www2.cid.harvard.edu/hiidpapers/geoecd.pdf

20. Citation: Not suggested reading! • Economic Reform and the Process of Global Integration ,  by Jeffrey D. Sachs; Andrew Warner Brookings Papers on Economic Activity, Vol. 1995, No. 1, 25th Anniversary Issue. (1995), pp. 1-95. Stable JSTOR URL: http://links.jstor.org/sici?sici=0007-2303%281995%291995%3A1%3C1%3AERATPO%3E2.0.CO%3B2-G(This will take you to the first page of the artice, you should then select print or download from the JSTOR menu inside your browser window.  Look near the top of the page.)

21. All you need is openness… Filter countries by: Politics: 1) Socialist 2) Domestic unrest 3) very low civil rights PNQ “political nonqualifiers” Openness: 1) import quota coverage 2) export monopolies SSA data only 3) Socialist 4) BMP black market premium of 30% or more A BMP occurs when the rate at which (say) dollars can be bought on the market (the street) is much higher than the official exchange rate. It is similar in impact to a tariff.

22. S+W Openness Results S+W Openness Results Table 3 Growth Rates 1970-89 qualify filtered out High n.a. PNQ Income 2.45 -0.175 ONQ -0.226 BothNQ Low 2.056 PNQ Income 4.745 1.0338 ONQ 0.598 BothNQ

23. S+W all co’s S+W BPEA 1995

24. All you need is openness… Filter countries by: Politics: 1) Socialist 2) Domestic unrest 3) very low civil rights PNQ “political nonqualifiers” Openness: 1) import quota coverage 2) export monopolies SSA data only 3) Socialist 4) BMP black market premium of 30% or more A BMP occurs when the rate at which (say) dollars can be bought on the market (the street) is much higher than the official exchange rate. It is similar in impact to a tariff.

25. S+W open co’s S+W BPEA 1995

26. S+W closed co’s S+W BPEA 1995

27. Politics over Markets View • Dani Rodrik and others argue that the quality of institutions rather than trade and geography really drive growth.

28. http://www.cid.harvard.edu/cidwp/pdf/097.pdf

30. Income, trade and institutions help each other per capita income good institutions good social attributes democracy less corruption good legal sys “trust” International trade and financial flows

31. Income, trade and institutions help each other per capita income good institutions good social attributes democracy less corruption good legal sys “trust” International trade and financial flows Rodrick and Smith’s other books Theory of Moral Sentiments & Lectures on Jurisprudence emphasize legal and gov reform. Sachs and Warner And Smith’s WoN emphasize removing trade restrictions