MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT

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MACROECONOMICSAND THE GLOBAL BUSINESS
ENVIRONMENT

• The Wealth of Nations
• The Supply Side

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Key Concepts

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

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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

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

• Is higher trend growth possible?
• Thomas Malthus (1798) No
• finite resources gt 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?

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The Importance of Economic Growth
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The Evidence
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The Evidence
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The Evidence
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The Evidence
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The Evidence
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The Evidence
Real Per Capita GDP
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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

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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

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Inequality and Growth
More Inequality ?
Growth Rate
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2004 Real Per Capita GDP (PPP)
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Explaining Differences in GDP per capita
GDP
GDP per capita
Population
Labor Productivity
Labor Force Participation Rate
Employment Rate
Average Hours Worked
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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

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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

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Analysis of Growth
Capital (buildings, infrastructure and machines)
Total Factor Productivity (technological
knowledge and efficiency)
Output (GDP)
Labor (Hours worked, number of workers)
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Production Function
Output TFP ? Capital Stocka ? Labor Hours(1-a)
A parameter (a number, 0 lt a lt 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

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Cobb-Douglas example
TFP 1 Capital 500 a0.6
Real GDP
Hours worked
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Real GDP
Hours Worked
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Output
Capital Stock
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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
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Implications for Labor Productivity
implies
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Labor Productivity TFP ? (Capital Stock/Labor
Hours)a
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Labor Productivity
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500
1000
Capital Stock per labor hour
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Increase in TFP
Output/Labor Hour TFP ? (Capital/Labor Hour)a
Labor Productivity
y2
y1
k1
Capital Stock per Labor Hour
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U.S. Labor Productivity Decomposition
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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

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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

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Growth accounting for Japan, Germany, the UK, and
the United States, 19131950.
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Growth accounting for Japan, Germany, the UK, and
the United States, 19501973.
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Growth accounting for Japan, Germany, the UK, and
the United States, 19731992.
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Europe and Asia
Europe relied on capital and TFP Asian
countries have relied on capital
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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

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Growth AccountingAsian Tigers, 1966 - 1990
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China vs. India 1993-2004
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Growth accounting in emerging markets, 19601994.
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Summary

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