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Lecture No. 1: Lecture No. 1:

Lecture No. 1: - PowerPoint Presentation

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Lecture No. 1: - PPT Presentation

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

capital growth long run growth capital run long labor income worker constant gdp basic countries solow grow model rate

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Slide1

Lecture No. 1:

Introduction to Macro-EconomicsSlide2
Slide3

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