Introduction to MacroEconomics Basic questions in Macroeconomics What creates growth in GDP per capita in the long run and what creates fluctuations in the short run What explains the level of longrun unemployment and what explains the shortrun variations in unemplo ID: 477093
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Slide1
Lecture No. 1:
Introduction to Macro-EconomicsSlide2Slide3
Basic questions in Macroeconomics
What creates growth in GDP per capita in the long run?’ and ‘what creates fluctuations in the short run
?’
‘What explains the level of long-run unemployment?’ and ‘what explains the short-run variations in unemployment?’ Slide4
Causes of fluctuations: Short Run
Exogenous
shocks
Short-run nominal rigidity
Expectational
errors
Factors of Growth: Long Run
Long run propensity to save and invest
Research and developmentSlide5
Macroeconomics for the long run:
Assumptions
Exogenous
shocks do not occur
Prices are fully adjusted
Expectations are correctSlide6
Lecture No. 2:
Some Facts about Prosperity and Growth Slide7
“
Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the ‘nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about
anything else
”
(Lucas, mid-1980s)Slide8
Growth Rates
(Real
GDP per
Person )
1960 to 1980
1980 to 2000
Egypt
2.5%
2.7%
Indonesia
3.5%
3.3%
India
1.6%
3.8%Slide9
Absolute Convergence (fig. 2.3 page 42
)
In
the long run GDP per worker (or per capita) converges to one and the same growth path in all countries, so that all countries converge on the same level of income per worker. Slide10
Conditional convergence (fig.2.7 page 48)
A country’s income per worker (or per capita) converges to a country-specific long-run growth path which is given by the basic structural characteristics of the country. The further below its own long-run growth path a country starts, the faster it will grow. Income per worker therefore converges to the same level across countries conditional on the countries being structurally alike.Slide11
Club convergence (fig.2.7 page 48
)
A country’s income per worker (or per capita) converges to a long-run growth path that depends on the country’s basic structural characteristics and on whether its initial GDP per capita is above or below a specific threshold value. The further below the relevant growth path a country starts out, the faster it will grow. Income per worker therefore converges to the same level across countries conditional on the countries being structurally alike and on the countries starting on the same side of their respective threshold values. Slide12
Balance growth (page 54)
The growth process follows a balanced growth path if GDP per worker, consumption per worker, the real wage rate, and the capital intensity all grow at one and the same constant rate, g, the labor force (population) grows at constant rate, n, GDP consumption, and capital grow at the common rate,
g+n
, the capital-output ratio is constant, and the rate of return on capital is constant.Slide13
Lecture No. 3:
Capital Accumulation and Growth:
The Basic Solow Model Slide14
Basic Question from previous lecture
How can a nation escape from poverty and ultimately become rich?
How can a country initiate a growth process that will lead it to a higher level of GDP and consumption per person?Slide15
Assumptions of Solow Growth Model
Out put in each period is determined by the available supplies of capital and labor due to competitive clearing of factor markets.
Total saving and investment is assumed to be an exogenous fraction of total income.
Labor force is assumed to grow at a given rate.
Agents (consumers, producers, and may be government)
Commodities (output, capital services and labor services)
All three markets are perfectly competitive
Therefore, available resources are fully utilized. Slide16
Features of Solow Growth Model
It incorporate the dynamic link between the flows of saving and investment and the stock of capital
Stock of capital increases by and amount equal to gross investment minus depreciation on the initial capital stock.
Suggested long run substitution between labor and capital
Evolution of capital through capital accumulation
Evolution of labor force though population growth
Evolution of total production or income through evolutions of total inputs of labor and capital
Answer the fundamental question “what determines the wealth of nation?”Slide17
Production Sector
Constant return to scale or homogeneous of degree one
Capital labor ratios are not constant
Constant income shares and independent of capital labor ratio
Household Sector
Long run labor supply is inelastic
Inelastic supply of capital services which is equal to the size of the capital stock
Household sector behaves as one representative consumer who earns all the country’s income
Household sector saves the exogenous fraction, s, of total income in each period
Biological behavior or the householdsSlide18
Basic Solow Growth Model
Fig no. 3.1 page no. 65
Equations Nos. 14,15,16,17,18,19
Analysis: Basic Solow Growth Model
Divide equation no. 14 by ‘L’
And get
eq
27
Fig 3.4
Eq
28
The Law of Motion
Analyze the Solow model in terms of variables we are interested in;
Insert
eq
17 into 18
Get
eq
29
Convergence to the Steady State
Differentiate eq. 29
Fig. 3.5