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7/31/2019 Econ2102 Lecture1 Handout(1)
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Econ2102
ProfessorJamesMorley
Lecture1
Whatexplainsthedifferencesinstandardsof
livingacrosscountriesandacrossBme?
CHAPTER1IntroducBonto
Macroeconomics
ClassOutline
SomeadministraBvemaers igpictureissuesinMacroeconomics TheasicNeoclassicalModelofAggregateProducBon
Readings:JonesChapters1-4 NextBme:JonesChapter5
Econ2102
Lecturer-in-charge:ProfessorJamesMorley Office:AS434 PhoneNo:93853366 Email:james.morley@unsw.edu.au ConsultaBonTimesWednesdays1:00-3:30 Coursewebsiteonlackboard
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TutorDetails
PaulVamvouklisEmail:paul.vamvouklis@hotmail.com
Yiyuan(Edward)XieEmail:yiyuan.xie@unsw.edu.au
XiaoChunXu(tutor-in-charge)Email:xiaochun.xu@unsw.edu.au
LearningandAssessment
TextbookMacroeconomics2ndEdiBon,CharlesI.Jones,Norton
Press
LecturesComplement,notsubsBtutefortextbook
TutorialsProblemsetsapplyconceptsfromtextbookand
lectures
AssignmentsandFinalExamAssignmentsdueon13/8and24/9
WhatisMacroeconomics?
Macroeconomicsisthestudyofaggregateeconomicphenomena:
Long-RunEconomicGrowthInflaBonTheusinessCycle
Howdomacroeconomistsexplain
thesephenomena?
Measurement(seeChapter2):RealGDPCPITheUnemploymentRate
ObservaBonandTheory ModelsandPredicBon InMacro2,wefocusonmodels
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Whyfocusonmodels?
ModelsmaketheassumpBonsandpredicBonsoftheoriesprecise
AllowsforbeerevaluaBonofcompeBngtheories
eerunderstandingofthepotenBalandlimitaBonsofdifferentpoliciestoachieve
desirableoutcomesformacrophenomena
IntermediateMacro
WewillstudytwokeymodelsthatmacroeconomistsactuallyuseSolow-SwanModeloflong-runeconomicgrowthNewKeynesianModelofbusinesscycles
Wewillexplorewhythemodelsaresowidelyapplied,butalsoconsidertheirlimitaBons
Wewillconsiderhowmacroeconomistsdevelopandextendtheirmodels
WewillalsoconsideradvancedtheoriesofLong-RunInflaBon,ConsumpBon,Investment,andExchangeRateDeterminaBon
TheStructureofModels TheKeyDisBncBon
ThedisBncBonbetweenexogenousandendogenousvariablesiskeytounderstandingmodels
Avoidconfusionbyspecifyingwhichiswhich Exogenousvariablesarenotbeingexplainedbythemodel,whileendogenousvariablesare
Amodelprovidesthemechanismbywhichtheendogenousvariablesaredeterminedby
theexogenousvariables
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Topic1:Long-RunGrowth
MeasuredasanincreaseinRealGDPPerCapita Despiteflaws,RealGDPPerCapitasBllcapturesbulkofvariaBoninstandardsoflivingacrosscountriesandacrossBme
TheNeoclassicalAggregateProducBonFuncBonisthebasisforasimplemodelofthelevelofRealGDPPerCapitaacrosscountries
TheSolow-SwanModelextendsthebasicNeoclassicalmodelofaggregateproducBontoexplaineconomicgrowthoverBme
Chapter4AModelofProducBon
Inthischapter,welearn:howtosetupandsolveamacroeconomicmodel.howaproducBonfuncBoncanhelpusunderstand
differencesinpercapitaGDPacrosscountries.
therelaBveimportanceofcapitalperpersonversustotalfactorproducBvityinaccounBngforthesedifferences.
therelevanceofreturnstoscaleanddiminishingmarginalproducts.
howtolookateconomicdatathroughthelensofamacroeconomicmodel.
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TheasicNeoclassicalModelofAggregate
ProducBon
Considerasingle,closedeconomy,withonlyoneconsumpBongood.
Setting Up the Model
AcertainnumberofinputsareusedintheproducBonofthegood
InputsLabor(L)Capital(K)
ProducBonfuncBonShowshowmuchoutput(Y)canbeproduced
givenanynumberofinputs
Othersvariableswithabarareparameters. ProducBonfuncBon:
ProductivityparameterOutput Inputs
TheCobb-DouglasproducBonfuncBonistheparBcularproducBonfuncBonthattakesthe
formof
Assumed to be 1/3.Explained later.
AproducBonfuncBonexhibitsconstantreturnstoscaleifdoublingeachinputexactly
doublesoutput.
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Returns to Scale Comparison
Find the sum of exponentson the inputs
sum to 1
sum to more than 1
sum to less than 1
Result
the function has constantreturns to scale
the function hasincreasing returns toscale
the function hasdecreasing returns toscale
StandardreplicaBonargumentAfirmcanbuildanidenBcalfactory,hireidenBcal
workers,doubleproducBonstocks,andcanexactlydoubleproducBon.
Impliesconstantreturnstoscale.
Allocating Resources
TherentalrateandwageratearetakenasgivenunderperfectcompeBBon.
Forsimplicity,thepriceoftheoutputisnormalizedtoone.
Firm chooses inputsto maximize profit
Rental rateof capital
Wage rate
Themarginalproductoflabor(MPL)TheaddiBonaloutputthatisproducedwhenone
unitoflaborisadded,holdingallotherinputs
constant.
Themarginalproductofcapital(MPK)TheaddiBonaloutputthatisproducedwhenone
unitofcapitalisadded,holdingallotherinputs
constant.
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ThesoluBonistousethefollowinghiringrules:
HirecapitalunBltheMPK=rHirelaborunBlMPL=w
IftheproducBonfuncBonhasconstantreturnstoscaleincapitalandlabor,itwill
exhibitdecreasingreturnstoscaleincapital
alone.
Solving the Model:General Equilibrium
Themodelhasfiveendogenousvariables:Output(Y)theamountofcapital(K)theamountoflabor(L)thewage(w)therentalpriceofcapital(r)
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ThemodelhasfiveequaBons:TheproducBonfuncBonTheruleforhiringcapitalTheruleforhiringlaborSupplyequalsthedemandforcapitalSupplyequalsthedemandforlabor
Theparametersinthemodel:TheproducBvityparameterTheexogenoussuppliesofcapitalandlabor
AsoluBontothemodelAnewsetofequaBonsthatexpressthefive
unknownsintermsoftheparametersandexogenousvariables
Calledanequilibrium Generalequilibrium
SoluBontothemodelwhenmorethanasinglemarketclears
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InthismodelThesoluBonimpliesfirmsemployallthesupplied
capitalandlaborintheeconomy.
TheproducBonfuncBonisevaluatedwiththegivensupplyofinputs.
ThewagerateistheMPLevaluatedattheequilibriumvaluesofY,K,andL.
TherentalrateistheMPKevaluatedattheequilibriumvaluesofY,K,andL.
Interpreting the Solution
Ifaneconomyisendowedwithmoremachinesorpeople,itwillproducemore.
TheequilibriumwageisproporBonaltooutputperworker.
Outputperworker=(Y/L) TheequilibriumrentalrateisproporBonaltooutputpercapital.
Outputpercapital=(Y/K)
Inmanycountries,empiricalevidenceshows:Two-thirdsofproducBonispaidtolabor.One-thirdofproducBonispaidtocapital.Thefactorsharesofthepaymentsareequalto
theexponentsontheinputsintheCobb-DouglasfuncBon.
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Inthemodel,allincomeispaidtocapitalorlabor.
ResultsinzeroprofitintheeconomyThisverifiestheassumpBonofperfect
compeBBon.
AlsoverifiesthatproducBonequalsspendingequalsincome.
AnalyzingtheProducBonModel
Percapita=perperson Perworker=permemberofthelaborforce.
Inthismodel,thetwoareequal. Wecanperformachangeofvariablestodefineoutputpercapita(y)andcapitalper
person(k).
OutputperpersonequalstheproducBvityparameterBmescapitalperpersonraisedtothe
one-thirdpower.
Output per person
Capital per personProductivityparameter
Whatmakesacountryrichorpoor? OutputperpersonishigheriftheproducBvityparameterishigheroriftheamountofcapitalperpersonishigher.
WhatcanyouinferaboutthevalueoftheproducBvityparameterortheamountofcapitalinpoorcountries?
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Comparing Models with Data
ThemodelisasimplificaBonofreality,sowemustverifywhetheritfitsthedatawell.
CHAPTER4AModelofProducBon
The Empirical Fit of the Production Model
DevelopmentaccounBng:Theuseofamodeltoexplaindifferencesin
incomesacrosscountries.
Set productivityparameter = 1
Diminishingreturnstocapitalimpliesthat:CountrieswithlowKwillhaveahighMPKCountrieswithalotofKwillhavealowMPK,and
cannotraiseGDPpercapitabymuchthrough
morecapitalaccumulaBon
IftheproducBvityparameteris1,themodeloverpredictsGDPpercapita.
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Productivity Differences: Improvingthe Fit of the Model
TheproducBvityparametermeasureshowefficientlycountriesareusingtheirfactor
inputs.
OencalledtotalfactorproducBvity(TFP) IfTFPisnolongerequalto1,wecanobtainabeerfitofthemodel.
However,dataonTFPisnotcollected. Itcanbecalculatedbecausewehavedataonoutput
andcapitalperperson.
TFPisreferredtoastheresidual. AlowerlevelofTFP
Impliesthatworkersproducelessoutputforanygivenlevelofcapitalperperson
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Outputdifferencesbetweentherichestandpoorestcountries?
Differencesincapitalperpersonexplainaboutone-thirdofthedifference.
TFPexplainstheremainingtwo-thirds. Thus,richcountriesarerichbecause:
Theyhavemorecapitalperperson.Moreimportantly,theyuselaborandcapital
moreefficiently.
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Understanding TFP Differences
Whyaresomecountriesmoreefficientatusingcapitalandlabor?
CHAPTER4AModelofProducBon
Human Capital
Humancapitalisthestockofskillsthatindividualsaccumulatetomakethemmore
producBve(forexample,educaBon).
ReturnstoeducaBonarethevalueoftheincreaseinwagesfromaddiBonalschooling.
DifferencesinHumancapitalhelpspredictsomeofthelargedifferencesinTFP.
CHAPTER4AModelofProducBon
Technology
Richercountriesmayusemoremodernandthusmoreefficienttechnologiesthanpoor
countries.
CHAPTER4AModelofProducBon
Institutions
Evenifhumancapitalandtechnologiesarebeerinrichcountries,whydotheyhavetheseadvantages?
InsBtuBonsrefertopropertyrights,theruleoflaw,governmentsystems,andcontractenforcement,amongmanyotheritems.
Well-definedinsBtuBonsandlawscreateaclimateforeconomicgrowththatismuchbeerthananenvironmentwithcorruptanduncertain
insBtuBons.
CHAPTER4AModelofProducBon
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Evaluating the Production Model
PercapitaGDPishigherifcapitalperpersonishigherandiffactorsareusedmoreefficiently.
ConstantreturnstoscaleimplythatoutputperpersoncanbewrienasafuncBonofcapitalperperson.
Capitalperpersonissubjecttodiminishingreturnsandthediminishingreturnsareverystrongbecausetheexponentismuchlessthanone.
CHAPTER4AModelofProducBon CHAPTER4AModelofProducBon
IntheabsenceofvaryingTFP,theproducBonmodelincorrectlypredictsdifferencesin
income.
AddiBonally,themodeldoesnotprovideananswerastowhycountrieshavedifferentTFP
levels.
I.e.,ithasalimitedabilitytopredictoutofsample
Policy Implications?
ShouldpolicymakersfocusoncapitalaccumulaBonasawaytoclosethegap
betweenrichandpoorcountries?
OrshouldtheyfocusonHumancapitaland/orinsBtuBons?
CHAPTER4AModelofProducBon
Summary
ThebasicneoclassicalmodelofaggregateproducBonsuggeststhelevelofeconomicdevelopmentdependsontheendowmentofcapital
However,variaBonincapitalacrosscountriesonlyexplainsabout1/3ofthethevariaBonineconomicdevelopment
TFPexplainstherestofthevariaBon EconomicresearchsuggeststhatTFPcanberelatedtothelevelofHumanCapitalandtoInsBtuBons
NextBme:capitalaccumulaBonandeconomicgrowth(theSolow-SwanModel)
CHAPTER4AModelofProducBon
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