Lecture 3

Introduction to Macroeconomics

• Course: Principles of Macroeconomics

• Instructor: Alvaro Boitier

• Institution: Babson College

• Term: Spring 2024

Lecture Overview

• Topic: Productivity and Growth

• References: Chapter 12 - Mankiw Principles of Macroeconomics (10th edition)

Global Income per Capita

• Highlight: Income variations across the globe

• Source: World Bank (2022)

  • URL: https://datatopics.worldbank.org/world-development-indicators/the-world-by-income-and-region.html

Facts About Economic Growth

Fact 1: Global Living Standards Differences

• Real GDP per Person (2020 dollars)

• Economic Growth Data of Selected Countries:

  • China: 1900–2020, $834 to $17,312, growth rate 2.56%

  • Japan: 1890–2020, $1,751 to $42,197, growth rate 2.48%

  • Brazil: 1900–2020, $907 to $14,836, growth rate 2.36%

  • U.S.: 1870–2020, $4,668 to $63,544, growth rate 1.76%

  • Other countries include Mexico, Germany, Canada, India, Argentina, Bangladesh, Pakistan, and the U.K.

Fact 2: Variation in Growth Rates

• Key Message: Rates of growth vary significantly across countries.

• Implication: Even poor countries can experience economic growth, while wealthier nations can be overtaken.

Economic Questions Addressed in Lecture

• Why do some countries have more wealth than others?

• What factors cause rapid growth in some economies and stagnation in others?

• What policies are effective in boosting growth rates and improving living standards?

Productivity Defined

• Standard of living relies on a country's ability to produce goods and services.

• Definition of productivity: Output produced per labor input (Productivity = Y / L).

  • Y = real GDP (quantity of output), L = quantity of labor.

Determinants of Productivity

• Factors affecting productivity:

  • Physical capital per worker

  • Human capital per worker

  • Natural resources per worker

  • Technological knowledge

Physical Capital

• Definition: Stock of equipment and structures used in production, denoted by K.

• Importance: Higher capital per worker (K/L) boosts productivity (Y/L).

Human Capital

• Definition: Knowledge and skills workers acquire (denoted by H).

• Benefits: Employee skillfulness leads to higher productivity (H/L).

Natural Resources

• Definition: Inputs into production provided by nature, denoted by N.

• Note: Resource abundance can enhance production, but some nations succeed despite limited natural resources (e.g., Japan).

Limits of Natural Resources

Sustainability Concerns

• Fixed supply of nonrenewable resources may impose growth limits.

• Necessity for technological advancements to optimize resource utilization (e.g., recycling).

Technological Knowledge

• Definition: Society's understanding of optimal production methods.

• Historical Example: Henry Ford and the assembly line revolution.

• Human capital enables technological advancements, enhancing productivity.

Production Function

• Formula: Y = A × F(L, K, H, N)

  • Y = Output, A = Technology level, F = Function of inputs.

• Returns to Scale:

  • Increasing returns: Output increases more than proportional to input increase.

  • Constant returns: Output increases proportionally.

  • Decreasing returns: Output increases less than proportional.

Growth Promotion

Important Factors for Economic Growth:

• Savings and Investment

• Research and Development

• Education

• Property Rights and Political Stability

• Health Care

• International Trade

• Population Growth

Savings and Investment

• Higher productivity can be achieved by increasing physical capital (K).

• Importance of government policies in fostering investment.

Understanding Diminishing Returns

• Observations: Higher K yields lesser productivity boosts when initial K levels are high.

• Implications for policy-making in infrastructure investment.

The Catch-up Effect

• Concept: Poorer nations often grow faster than richer ones, leading to convergence in living standards given similar investment levels.

• Example Comparisons: South Korea's rapid growth alongside U.S. stagnation due to varying capital distributions.

Foreign Investments

• Categories:

  • Foreign Direct Investment: Investments owned & operated by foreign entities.

  • Foreign Portfolio Investment: Investments financed from abroad but operated domestically.

Foreign Credit

• Institutions like the World Bank provide essential finance and expertise to developing nations.

• Impacts particularly crucial in resource-scarce countries.

Policies to Enhance Research and Development

• Promotion of public goods in technological progress is key.

• Strategies: patent laws, tax incentives, university research grants.

Education and Human Capital Investment

• Significant impact of education on individual productivity and economic growth.

• Policies: investment in public schooling and financial aid initiatives.

Role of Property Rights & Political Stability

• Effective systems encourage economic growth and living standards.

• Importance of a reliable legal system to protect individual rights.

Justice System Crises

• Weak enforcement of contracts and corruption hampers growth in many developing nations.

Case Study Insights

• Comparison of Argentina’s economic volatility versus South Korea’s sustained growth trajectory.

International Trade Policies

• Importance of outward-oriented policies for integration into the global economy.

• Case examples: Successful models in Korea, Singapore, and Taiwan.

Health as an Investment

• Health care seen as a vital investment for boosting labor productivity in nations suffering from malnutrition.

Population Growth Dynamics

• Malthusian concerns highlight potential issues with high population growth rates affecting economic stability and resource distribution.

Conclusion: Factors Behind U.S. Success

• Key aspects leading to U.S. economic success include a conducive entrepreneurial environment, research capabilities, and immigration-friendly policies.