Economics Quiz on Production Functions

Development Economics 1

• Lecture 1 - The Facts of Economic Growth:

  • VUONG Hung Cuong, AEI International School, Université Paris-Est Créteil, September 11, 2024
  • Introduction of Development economics
  • Why do the richest countries grow at 2 percent per year?
  • Why are some countries 50x richer than others?
  • Economic Growth vs Economic Development

• Lecture 1 - Introduction (Continued)

  • Name that Country:
    • Low life expectancy
    • High infant mortality rate
    • High rate of households without essential services.

• Lecture 1 - The Power of Economic Growth

  • U.S. transformation over a century
  • Increased standards of living
  • Rise in life expectancy (1900-2024)
  • Historical example of the Great financier Nathan Rothschild
    • Poorer than contemporary Americans in terms of wealth
    • Would likely prefer antibiotics to gold plate

• Lecture 1 - Plan

  • Growth patterns of the richest countries
  • Economic growth throughout the world (catching up, falling behind, staying in place)
  • Characteristics of countries in various groups

• Lecture 1 - Growth Pattern (Example of US Data)

  • GDP per person in the US has grown at a steady rate of around 2% per year for 150 years.
  • Starting with ~3,000 USD in 1870, per capita GDP reached ~50,000 USD by 2014.
  • The Great Depression caused a significant decline in income, but it was temporary

• Lecture 1 - Growth Pattern (Continued)

  • Stability of U.S. Growth (1870-2007) — averaged 2.03% per year.
  • Stability of Growth (1929-2007) — averaged 2.23% per year.
  • Growth (1900-1950) — averaged 2.06%.
  • Growth (1950-2007) — averaged 2.16%.

• Lecture 1 - Growth Pattern (Continued)

  • Growth (1950-1973) — averaged 2.50%
  • Growth (1973-1995) — averaged 1.82%.
  • Growth (1995-2007) — averaged 2.13%
  • Growth patterns — mixed results since 1950.

• Lecture 1 - Living Standards

  • Exponential Growth in Living Standards
    • A very recent phenomenon
  • Doubling of Living Standards
    • Between 1 AD and 1820 the standard of living in the West doubled.
    • Over next 200 years GDP per person rose more than 20x

• Lecture 1 - Economic Development

  • Why some countries are richer than others?
  • Through the lens of a production function
  • Inputs versus productivity
  • Why do some countries have more inputs/why more efficient?
  • Rules and institutions
  • Catch up growth (how to understand it)

• Lecture 1 - Economic Development (Korea Example)

  • Korea before World War II
  • Shared cultural heritage, government, and geography
  • North Korea had economic advantages (e.g., resources)
  • Division after war — different rules led to dramatic growth differences.

• Lecture 1 - Economic Development (Additional Examples)

  • Similar "natural" experiments in other regions (e.g., post-WWII Germany, China)
  • Historical patterns of economic growth and development

• Lecture 1 - Growth is spreading across countries

  • The Great Divergence
    • Growth spread unevenly over time
  • The difference in the rate of growth among countries is due to the different start times for growth

• Lecture 1 - Growth spreading across countries (continued)

  • Inequality in Income, 1300 AD.
  • Inequality in Income, 1950 AD and 2010 AD.
  • How growth is spreading in countries over time.

• Lecture 2 - Introduction

  • How to measure the economy?
  • What should we include?
  • What should we leave out?
  • Adding dissimilar elements (automobile production, grocery store employment, and home sales) to one number, showing the status of the economy.
  • Composition of GDP over time and across countries

• Lecture 2 - Gross Domestic Product (GDP)

  • Definition, example of U.S. GDP in 2021
  • Market Value — meaning that GDP is valued in a certain currency (e.g., dollars)
  • "Final"—implies that sales of used items aren't included in GDP
  • "Produced"—purely financial transactions aren't included (e.g., stock sales and money transfers)
  • Services. Transportation, medical care, and tourism.

• Lecture 2 - Measurement of GDP (Production, Expenditure, Income approaches)

• Lecture 2 - Expenditure Approach to GDP

  • National income accounts
  • GDP = Consumption (C) + Investment (I) + Government Purchases (G) + Net Exports(NX)

• Lecture 2 - Expenditure Approach to GDP (U.S. 2012 Data)

  • Breakdown of GDP spending categories in 2012
    • Consumption, Investment, Government Purchases, Net Exports (Exports-Imports)

• Lecture 2 - Expenditure Approach to GDP (Composition and Trends)

  • Relative stable share in total GDP over the past 90yrs.

• Lecture 2 - The Income Approach to GDP

  • National income accounting perspective
  • every dollar of product sold ➞ dollar of income earned.

• Lecture 2 - Key Aspects of the Income Approach

  • Compensation of employees
  • Wages and salaries are benefits
  • Taxes, Net operating surplus of businesses
  • Depreciation

• Lecture 2 - The Production Approach to GDP

  • Exactly counting everything once
  • Excluding second-hand goods from GDP calculation.

• Lecture 3 - GDP and Applications

  • What are nominal and real GDP?
  • How do we measure a change in real GDP over time?
  • What does the quantity index for calculating real GDP represent? (Laspeyres, Paasche, or Chain Weighting)
  • How do we compare economic performance across countries (relying on currency exchange rates)? How large is China's economy relative to the U.S. one?

• Lecture 3 - Exercise 1 — Basic GDP Calculations

  • GDP impact calculations-Scenarios
    • College tuition
    • Used car
    • Government spending on a dam.
    • Foreign graduate students teaching assistant earnings.

• Lecture 3 - Exercise 2 — What Counts in GDP

  • Calculating changes in GDP based on different transactions.

• Lecture 3 - Exercise 3 — Capital Gains

  • What constitutes capital gains and why aren't they typically incorporated into GDP.

• Lecture 3 - Exercise 4 — Calculating GDP

  • Example of making and selling goods.
  • Calculating total GDP

• Lecture 3 - Exercise 5 — Size of India's Economy

  • Comparing Indian GDP to U.S. GDP.
  • How important are relative prices?

• Lecture 3 - Exercise 6 — Earthquakes and GDP

  • How do earthquakes affect the standard of living of a country?
    • Measured GDP
  • Impact on economic well-being.

• Lecture 4 - Growth Basics

  • Definition of Economic Growth
  • Per capita GDP increase

• Lecture 4 - Growth Example — Population

  • Population growth example-constant growth rate (2% per year) for 100 years

• Lecture 4 - Rule of 70

  • Calculation of the length of time required for incomes to double with different growth rates
  • Using the ratio scale to visualize these changes more effectively, graphically

• Lecture 4 - Growth in practice

  • Taiwan's rapid growth — doubling every 12 years.
  • Economic well-being of young adults today versus their grandparents.
  • Growth in poorer countries — comparing countries from Figure 3.8

• Lecture 4 - Properties of Growth Rates

  • Growth rates of ratios, products, and powers
  • Examples

• Lecture 4 - Example of growth rate calculations

  • Formula for calculations

• Lecture 4 - Exercises

  • Calculations of growth rates
    • given different equations

• Lecture 5 - Growth and Production Function

  • Definition of economic models
  • Example with ice cream production

• Lecture 5 - Example with ice cream production and returns to scale.

  • Constant returns to scale - doubling the inputs leads to doubling the outputs

• Lecture 5 - Standard Replication Argument

  • How can a firm in Shangri-La double its output of ice-cream?
  • Replicating the firm is a way to double the input.

• Lecture 5 - Marginal Product

  • Marginal product of capital (MPK) and labor for ice cream production
    • As you increase the input, the output increases less rapidly.

• Lecture 5 - Diminishing Marginal Production of capital

  • Finding the derivative of the production function using calculus

• Lecture 5 - The Model - General Equilibrium, Markets (capital & labor) and Ice Cream

  • Five equations, and five unknowns. Illustrating the model dynamically

• Lecture 5 - Interpretations, Understanding TFP differences

  • Physical capital—machines and buildings that help produce goods.
  • Human capital-skills that individuals acquire making them more productive
  • Technology-New methods and technologies in production are used more in rich countries than poorer ones. (e.g., computers, pharmaceutical, and so on.)
  • Institutions-governments play a role in influencing TFP. (e.g. corruption)

• Lecture 5 - Evidence and Examples - U.S. and China's Production Functions (TFP)

• Lecture 5 - Exercises

• Lecture 6 - Solow Model

• Lecture 6 - South Korea and the Philippines

  • Comparison of 1960s data
  • Comparison of 2017 data

• Lecture 6 - The Solow Growth Model - Build on production function - endogenize capital

• Lecture 6 - The Solow Model Story

  • Farm analogy with corn
    • Farmers plant and tend crops, and harvest.
  • They eat some of the harvest and save some to plant the next year
    • Each seed kernel produces many more kernels

• Lecture 6 - The Economy of Solovia

  • Production function
  • Capital accumulation (Kt+1 = Kt+ It – dKt)
  • Labor Force — Lt = [ ]
  • Resources Constraint — Ct + It = Yt
  • Allocation of resources — I = 5Yt

• Lecture 6 - The Economy and Real Interest Rate

  • Simplification: leaving out specific prices
  • Measuring real interest rates-return (real) on saving or borrowing
  • Saving equals investment

• Lecture 6 - Solving the Solow Model

• Lecture 6 - The Solow Diagram

• Lecture 6 - The Capital-Output Ratio

• Lecture 6 - Explaining capital in the Solow model

• Lecture 6 - Economic Growth in the Solow Model

  • In the long run, there is no growth

• Lecture 6 - Growth and Transition Dynamics

• Lecture 6 - Case Study - Examples, The U.S. and China

• Lecture 6- Case Study - Growth Rates in the OECD

• Lecture 6 - Growth Rates around the world

  • How investment (measured as percentage of GDP) varies from country to country.

• Lecture 6 - Investment in South Korea and The Philippines

  • Comparison in relative investment rates.

• Lecture 6 - What we learn from the Solow framework - Shortcomings of the frameworks.

  • Capital accumulation

• Lecture 6 - Questions for Review

• Lecture 7 - Romer Model

• Lecture 7 - Solow and Romer

  • Capital versus Labor
  • Objects versus Ideas
    • Raw Materials (objects) are finite
    • Ideas (instructions or recipes) are non-rivalrous

• Lecture 7 - The Idea Diagram

  • Idea → Nonrivalry → Increasing returns

• Lecture 7 - Nonrivalry

  • How can an idea be used by many people simultaneously — example of an architectural plan, method for turning oil into plastic, the genetic material (DNA)

• Lecture 7 - Excludability

  • The Extent to which someone can restrict the use of an idea.

• Lecture 7 - Increasing Returns with Example (Asthma Inc.)

• Lecture 7 - Revisit our Standard Production Function

• Lecture 7 - Problems with Perfect Competition

  • Examples of products with high marginal costs

• Lecture 7 - How to Address Problems with Perfect Competition, Intellectual Property, Regulations

• Lecture 7 - Population Growth in the Solow Model

• Lecture 7 - The Romer Model: Our Corn Farm Again

  • Illustrating the new ideas in the Romer Model

• Lecture 7 - The Key Insight: Nonrivalry

  • Output per person depends on the total stock of ideas (not just ideas per person)

• Lecture 7 - Where do ideas come from?

  • Model that each person produces one new idea per year

• Lecture 7 - What is the long-run growth rate of A?

• Lecture 7 - Growth in the Romer Model

  • Growth of GDP is proportional to the growth of population

• Lecture 7 - From IRS to Growth

  • Objects versus Ideas — difference in how growth occurs
  • Income per person depends on aggregate stock of knowledge, regardless of number of ideas per person

• Lecture 7 - Example - Solow and Romer comparing models - Comparing MobiPhones in the Solow and Romer Models

• Lecture 7 - World Growth Over the Very Long Run

  • Graph showing population and per capita GDP growth

• Lecture 7 - Combining the Solow and Romer Models - Combining models to explain world growth over time.

• Lecture 7 - Questions for review