Macro Sustainability and Growth Summary PDF

**Macro economics** **Countries now vs past** - Increase in material wealth - Decrease in amount of work needed - Even poor countries have significant increase in living standards - In face of the decline of natural resources even rich countries will eventually have to cut back on c...

**Macro economics** **Countries now vs past** - Increase in material wealth - Decrease in amount of work needed - Even poor countries have significant increase in living standards - In face of the decline of natural resources even rich countries will eventually have to cut back on consumption **Gross domestic product (GDP)-\>** a measure of the value of all the goods and services produced by a country in a year. - Can be calculated as either the value of the output produced by a country or equivalently as the total income. - GDP is known as output or national income **Purchasing Power Parity (PPP)-\>** a set of artificially constructed factors exchange rate to convert amounts from other years and countries - the difference in income among countries are so large that they can be difficult to comprehend. **\***High GDP can be because a country has many people and not because the citizens are rich**\*** **\***GDP per capita can be high while the total being low due to a low population**\*** **Growth rates of income-\>** How quickly their income per capita is rising - Growth is important, a country that grows faster will move to a higher level if income overtime A white background with black text Description automatically generated PAGE 2.1\*  **Growth during recent decades:** - Growth is defined to be long-run phenomenon - Separate long term (trend growth) from short term (business cycles) fluctuations - Short-run fluctuations in output attract the most attention - Long-run movements are much harder to identify, such a movement might take a decade to be visible - Overtime it's the long-run trend that determines how rich a country is - Difference in average growth also determine which country is richer **Income inequality:** - **Within-country:** income inequality among the population - **Between-country:** income inequality between countries - People care more about income inequality within-country than between-country **Common errors of GDP:** - Some economic activity is hidden or unnoticed - Sometimes data from small sample inaccurately depict the total population output - Governments occasionally engage in deliberate falsification - During times of political turmoil, data collection can cease all together - Errors can creep in via the PPP adjustment **Capital-\>** machines, vehicles, buildings, and other pieces of equipment - The more capital a worker has, the more output the worker produces **Investment-\>** the goods and services devoted to the production of new capital rather than consumed - Difference in capital can be explained by income difference between 2 countries (how much can they invest **Investment rate-\>** the fraction of a country's income that it invests **Productivity-\>** the amount of output produced with each unit of capitol, determined by: - **Technology**-\> available knowledge about how inputs can be combined to produce output - **Efficiency**-\> hoe the available technology and inputs into production are actually used in producing output Productivity= Technology \* Efficiency **Fundamentals-\>** Underlying factors - Differences in culture (effort of people) - Different economic policies (taxes, tariffs, regulations, etc) - Differences in geography (natural resources, climate, or proximity to world markets) **\***things that make a country richer, the accumulation of inputs and the productivity whith which the inputs are used\* **Proximity cause-\>** an event that is immediately responsible for causing some observed result. **Ultimate cause-\>** something that affects an observed result through a chain of intermediate events **Factors of production-\>** Factors and inputs that determine the output/ production **Production function**-\> a mathematical description of how the inputs a firm uses are transformed into its output. A diagram of different stages of production Description automatically generated **Panel 1-\>** 2 countries have same production function, but C1 has higher level of factors of production than C2 **Panel 2-\>** 2 countries have same quantities of factors of production but have different productivity **Panel 3-\>** C1 has both more factors of production and higher productivity **Economic models-\>** are simplified representations of reality that can be used to analyze how economic variables are determined - **Quantitative analysis-\>** using data in assigning magnitudes to the different parts of an economic model WEEK 2 **Investment-\>** the process and cost of creating capital **5 key characteristics of capital:** 1. **Capital is productive, the more we have of it the higher the outcome** 2. **Capital is created by man** - Capital distinguishes itself from natural resources because it has been manmade/ created - Capital requires sacrifice of consumption - Country with lower investment will have higher consumption 3. **Capital is rival in use** - Only limited number can use a piece of capital 4. **Capital makes returns** 5. **Capital wears out (depreciates)** **Capital's role in production** The basic formula for output is Y=F(K,L) Y= Output K= Factors of production L= Output per worker - We learn that the only deciding factor is K - So we can make it smaller: Y= output per worker k= factors of production per worker - This function has diminishing marginal production (with every unit of k added less is added to the output) **Cobb-Douglas production function-\>** specific functional form for the production function. - Formula-\> F(K,L)=AK^a^L^1-a^ A= parameter that measures productivity a= parameter which assumes to have a value between 0 and 1, which determines how capitol and labor combine to produce output for smaller per person scale (because than only k determines y): y=Ak^a^ **Marginal product of labor (MPL)-\>** how much an additional worker earns - If wage is lower than the MPL it means that hiring a worker will increase output - If wage is equal to MPL it means that hiring a worker won't have any effect on output - If wage is higher than MPL than it means that the firm should reduce number of workers The marginal product of capitol for this production is: MPK=aAK^a-1^L^1-a^ - MPL is derivative of Y in respect to Labor - MPK is derivative of Y in respect to Capital a= Capitals's share of income *Capital's share of income*=(MPK\*K)/Y=a - The share of labor in national income is equivalent to 1-a **Solow Model:** - We assume that input L is constant over time - We assume there is no improvement in productivity - We assume A is constant **Change in capital stock (\^K)-\>** difference between amount of investment and the amount of depreciation. I= quantity of investment D= quantity of depreciation \^K=I-D i= quantity of investment per worker d= quantity of depreciation per worker \^k=i-d A math problem with a few equations Description automatically generated with medium confidence In summary: - i is made out of a portion of a workers output which is determined by their capitol - there ÿ is the percentage of the output created by y that gets invested again - k depreciates overtime, & is the percentage its reduced by  **Steady state (K^ss^)-\>** in this case d-i and \^k=0 - if ÿf(k)=&k than nothing happens - The capitol stock is attracted to steady state If you want to find the k^ss^ value and there by the y^ss^ value than you will need to use this formula: K~ss~=((ÿ\*A) / &)^1/(1-a)^ Then to calculate y~ss~ you just put k~ss~ into the normal formula for y: Y~ss~=A\*(k~ss~)^a^ **Between 2 countries**: - You hold everything constant, only exception being the investment rate or depreciation you want to compare - Than you divide both outcomes of y with each other (the smaller outcome on top) - Than you will get the ratio between the smaller compared to the bigger  you can also use this formula, this is x compared to y - if the ratio is \>1 than it means that x has higher investment than y WEEK 3 **Population:** - both influence consumption and productive capacity of economy - rapid population growth causes poverty - population growth and income per capita may be indirectly related - determinants of population growth are mortality and fertility **Population over the long run:** - there is slow growth of the population throughout much of human history **The Malthusian Model-\>** - key factor of population growth is the finite amount of resources - as population expend quality of life decreases (income per capita) - after time there will be a stable point **Positive check-\>** people take into account the restrictions of the limited resources when thinking of getting a babby **Preventive check-\>** the human constraint where fertility is deliberately reduced to prevent poverty **Figure 4.3** - panel **A** indicates how population size influences the standard of living (income per capita) - panel **B** indicates how higher income influences population - Y~ss~= **steady-state** level of income per capita - L~ss~= **steady-state** population size - Y~ss~ corresponds with a 0 population growth rate - Malthusian model suggest that higher productivity does not necessarily result in higher living standards but rather in a larger population. - according to Malthus, the only way for society to raise its standard of living is through "moral restraint" limiting population growth **Breakdown Malthusian Model** - The last 200 years have proven that this theory isn't true, there has been an increase in both living standards and population size - **Wealthier countries actually show lower population growth rates** **2 key aspects of the model that were not taken into account**: 1. The notion that a fixed land supply would lead to declining living standards with higher population 2. the idea that population growth occurs whenever income per capita is high enough - increase in both living standards and population is thanks to development in technology - this model is still relevant but level of effect has diminished over time **Capital dilution-\>** the negative effect of population growth on capital per worker (if capital stays the same but population increases than each worker will have less capital than before) - can be countered by keeping investing in capital **The solow model:** **\^k= y\*f(k)-&k** - dilution from the arrival of new workers operates in exactly the same manner as depreciation there for the new function would be: **\^k= y\*f(k)-&k-nk** Where-\> n**= the growth rate of the labor force** You can re write this as Now we want to find the **steady state:** - we do the same thing as before-\> we equal it to 0  - the solow model, modified with the population growth rate, provides an explanation for why countries with high population growth rates are poorer than countries with low population growth rates. -To find the steady state (k~ss~) we can use the same formula as before, only different thing is that we add the n variable: To find the y~ss~ we just put it in the same formula: - comparing 2 countries with each other goes in the same way as mentioned before - find both their y~ss~ and divide 1 by the other, keeping everything constant except the growth rate **Demographic transition-\>** the process through which a country's demographic characteristics undergo transformation during development. - Wealthy country's have mostly completed this - Developing countries haven't **Explaining the mortality transition:** 1. There have been enhancements in the standards of living, particularly in the quantity and quality of food consumption 2. Reducing mortality has been the implementation of public health measure, such a securing clean water and food and draining mosquito-infested swamps 3. The impact of medical treatments in curing diseases **Total Fertility Rate (TFR)-\>** indicator, representing the number of children a woman would have if she lived through all het childbearing years. Calculation: Age 20-29 and 2 children**-\> 0.2 children** a year over **20 years** 20\*0.2=4 **4 is the TFR** **Interaction of fertility and mortality:** **Net rate of reproduction (NNR)-\>** a measure that combines the effects of fertility and mortality in determining population growth - NNR of 1 means no growth - NNR of 2 means that the population will double every generation **Human capital-\>** what you offer as a person (strength, intelligence and education) - Human capital shares similarities with physical capital: 1. Both involve productive qualities 2. They are products of investment 3. Human capital yields a return 4. Human capital experiences deprecation - Human capital is "installed' in its owner - Humans have a preset limit of growth - Physical capital can keep growing and is not predetermined - In wealthy countries growth in human capital is slowing down - There is a limit to how much education can keep improving - Growth in human capital is anticipated to contribute less to growth in the coming century - Growth rate in human capital increases the level of the steady state without diluting the per capita income WEEK 4 - Productivity is the efficiency in which factors of production are transformed into output **Measuring productivity differences among countries:** Y=AK^a^(hL)^1-a^ Y**= total ouput** A**= measure of productivity** K**= quantity of physical capital** L**= numbers of workers** h**= quantity of human capital per worker** a**= number between zero and 1 (capital share of income)** - Dividing both sides of equation by L you get y= Ak^a^h^1-a^ y**= output per worker** k**= physical capital per worker** - Physical capital and human capital are the 2 factors that determine the output of this function ***Factors of production*** = k^a^h^1-a^ - We can think of the production function as being ***Output = productivity(A) \* factors of production(k^a^h^1-a^)*** **Comparing 2 countries:** You can get 3 different ratios-\> 1. **Ratio of productivity** ***Ratio of productivity*** = A~1~/A~2~ 2. **Ratio of factors of production** ***Ratio of factors of production*** = (k~1~^a^h~1~^1-a^)/ (k~2~^a^h~2~^1-a^) 3. **Ratio of output** ***Ratio of output*** = y~1~/y~2~ ***Ratio of output*** = A~1~/A~2~ \* (k~1~^a^h~1~^1-a^)/ (k~2~^a^h~2~^1-a^) **Development accounting-\>** technique for breaking down differences in income into the part that is accounted for by differences in productivity and the part accounted for by differences in factor accumulation. **Growth accounting** - We have 3 different kinds of growth rate that we use for growth accounting - It is similar to what is her above 1. **Growth rate of productivity** 2. **Growth rate of factor of production** 3. **Growth rate of output** - The same kind of logic is here ***Growth rate of output = growth rate of productivity + growth rate of factor of production*** **Productivity (A)-\>** measured by technology and efficiency A = T \* E T**= measure of technology** E**= measure of efficiency** **5 types of inefficiency:** 1. Unproductive activities 2. Idle resources 3. Misallocation of Factors among sectors 4. Misallocation of factors among firms 5. Technology blocking 1. **Unproductive activities** - Inefficiency arises when resources shift from productive to unproductive, lacking economic value: - Illegal practices cost unproductive activities to prevent them, no revenue is made 2. **Idle resources** - When labor and capital remains unused - Includes actual unemployment - Overstaffing wastes workers - Unemployed people cost extra money through subsidies 3. **Misallocation of factors among sectors** - Where resources are directed to the wrong parts of the economy - Often observed in the allocation of labor and capital - In the [Figure] you can see that their was a misallocation, more labor should have gone to sector 2. - In that case their would be an overall higher output 4. **Misallocation of factors among firms** - Same deal as before but now for firms - Caused by differences in productivity levels due to technology, organization, or management. - Also when government or other firms restrict each other from achieving - Example: monopoly causes other firms to not be able to compete -\> less production thus less people working -\> monopoly determines prices -\> not good level for economy 5. **Technology blocking** - When someone deliberately prevents the use of a technology that could feasibly be employed, without physical of technical barriers. - Take for example the time when the church worked against the advancement of technology - Or when a company likes to "do it the old way" - Often arises when someone benefits from NOT upgrading (they will try to block it for their own interest) **Week 5** **R&D-\>** portion of revenue spend on technology and innovation: - Should in long run increase capita per worker **Transfer of technology:** - Unlike humans, it's not physical and are essentially ideas - Technology is nonrival, meaning that there is no limit to how many people can use it (like a hammer for example) - Nonrivalry downside is that the owners/ inventor has difficulty keeping it, many will get it without their permission - If it were to be physical the owner could charge companies to use it, not anymore now **Determinants of R&D spending:** - Most R&D spending is doen by the private sector, especially firms - Profit considerations play a pivotal role in motivating firms to invest in R&D - Firms undertake R&D spending with anticipation of new products or more efficient production methods Several considerations affect the amount of R&D conducted by firms: 1. **The advantage conferred by a new invention**, being able to patent it is crucial 2. **Market size**, larger available market results in greater profit for new inventions 3. **Duration of competitive advantage** 4. **Uncertainty surrounding the research process**, if risk outweighs the profit than its quiet the deterrent fir investing in R&D **Creative destruction-\>** developing new technology, but this ends the old technologies life **Patent-\>** serve as a legal instrument to grant the creators the exclusive right to make, use, and sell their invention for a specific period - **First to file**-\> patent goes to first person that files it - **First to invent**-\> patent goes to person who invented it first - This can lead to many problems which takes time to solve **Patent trolls**-\> firms with patent (which they often don't fully use) wait till another company has made technology or invention which may look like theirs and then sues. **One-Country Model:** - We ignore the roles of both physical and human capital - Only input is labor L~y~**= number of workers who are involved in producing output** L~A~**= number of workers who are involved in creating new technologies** L**= total size of labor force** **L = L~y~ + L~A~** ÿ~A~**= fraction of the labor force engaging in R&D** **ÿ~A~ = L~A~ / L** - One more way to calculate L~y~ **L~y~ = (1 -- ÿ~A~) \* L** - If we want to find the Total output in this case its easy because we ignore everything except productivity and workers involved in producing output. **Y = A \* L~y~** - Combining them you get **Y = A \* L\*(1 -- ÿ~A~)** - Or in per worker term **y = A \* (1 -- ÿ~A~)** but why invest in R&D then? A\^**= growth rate of productivity** u**= tells u show much labor is required to achieve a given rate of productivity growth** **A\^ = L~A~ / u** - The larger u is, the more labor must be devoted to R&D to achieve a given rate of technological growth. We can rewrite the formula for technical purposes: **A\^ = L \* (ÿ~A~ / u)** If ÿ~A~ is constant than: **y\^ = A\^** **Two-Country model:** - The transfer of technologies among firms is an important consideration 2 ways and country can acquire new technology: 1. **Innovation:** the invention of a technology 2. **Imitation:** copying a technology from elsewhere u~c~**= the cost of copying** **u~c~ = c \* (A~1~ / A~2~)** WEEK 6 **Non-renewable resource-\>** has a fixes quantity on earth, consumption implies permanent depletion **Renewable resource-\>** one that is replenished by natural processes and can be used repeatedly S~t~**-\> resource stock at the beginning of period t** H~t~**-\> quantity of the resource harvested in period t** G~t~**-\> quantity that grows in period t** **S\^~t~ = S~t-1~ - S~t~ = G~t~ -- H~t~** S\***-\> maximum what can be harvested without depleting further stock** **Property right over resources:** **Tragedy of the commons-\>** over use of a resource hurts everybody in the long run - To overcome this, property rights may be issued - Other way is by limiting harvest of resources I**= resource intensity** L**= size of population** R**= resource consumption** y**= GDP per capita** **I = R / (y\*L)** **or** **R = I\*L\*y** **and** **R\^ = I\^ + y\^ + L\^** - The equation above says that a change of 1% in population size and output per capita and keeping I constant will cause a grow of 2% total resource use - There is an ongoing crisis for technology metal (metal used in sustainable products) - World leaders have to work together to ensure enough supply - High fluctuation is ongoing (China produces 90% of worlds rare earth elements)