1EC 308 – Spring 2015 Lecture 1

EC 308 – Lecture 1

ADVANCED MACROECONOMICS

Part 1: Introduction

2EC 308 – Spring 2015 Lecture 1

Logistics of the Course Instructor: Murat Koyuncu

E-mail: mkoyuncu@boun.edu.tr

Office: NB214, Phone: (212) 359-7640

Lectures: Mondays 4, 12:00-12:50 at NH 305

Wednesdays 78, 15:00-16:50 at NH 203

Office Hours: Mondays 15:00-17:00, and by appointment

3EC 308 – Spring 2015 Lecture 1

Logistics of the Course

Weekly Problem Sessions: TBA (Classroom Info to be announced every week via email and on the coursewebsite)

Teaching Assistants: Uğur Yeşilbayraktar,uguryesilbayraktar@gmail.com; Eray Türkel, eray.turkel@boun.edu.tr

Course Webpage: Accessible via the Economics department website http://www.econ.boun.edu.tr by clicking on the “Courses” tab.

Please download the syllabus from the course webpage!

4EC 308 – Spring 2015 Lecture 1

Logistics of the CourseDescription

EC 308 is an advanced course on macroeconomics.

Aim: To introduce the students to dynamic macroeconomic models within the context of the growth theory, as well as to the methodological tools that are necessary to understand the related literature.

This course is mainly geared towards students who are planning to continue to post-graduate programs in economics.

Material to be covered depends heavily on mathematical tools. Hence, the student should have a good knowledge of calculus and differential equations at least at the level of EC 223.

5EC 308 – Spring 2015 Lecture 1

Logistics of the CourseTextbook:

Lecture notes are the primary source for this course. There is no required text. However, for some of the topics, the following books might be useful: Economic Growth, by Barro and Sala-i Martin (2nd Edition, 2004,

McGraw-Hill) Introduction to Economic Growth by Charles I. Jones (2nd Edition,

2002, W.W. Norton) Advanced Macroeconomics by David Romer (3rd edition, 2006,

McGraw-Hill)

Additional required readings will be posted on the course website.

6EC 308 – Spring 2015 Lecture 1

AssessmentAssignments and In-Class Quizzes: 30% Assignments: Can be done in groups of two Any two “too similar” assignments will both get zero. If this repeats, it will result in a letter grade of F from the course and

disciplinary action. Late assignments will not be accepted under any condition. Quizzes: Some announced, some unannounced.

Midterm Exam: 30% -- Tentative Date: March 31st, 2015

Final Exam (Cumulative): 40%

Problem Sessions: There will be weekly recitation sections held by your teaching assistant (date and time will be announced). Attendance is not required but strongly recommended.

7EC 308 – Spring 2015 Lecture 1

Important Final Exam Requirement: In order to be able to

enter the final exam, a student must have earned at least 40 percent of the available points at the end of the term (via the midterm, assignments and quizzes).

Students with grades below this limit will be announced on the course website prior to the final exam date and will not be allowed to take the final exam.

8EC 308 – Spring 2015 Lecture 1

Miscellaneous Make-up Exam Policy: If you miss the midterm exam for any reason,

you must PERSONALLY bring a written statement of details of your excuse for missing the midterm to my office within 1 week of the exam. Makeup exam will be held exactly one week after the exam. Documentation brought in later will NOT be accepted. I reserve the right to refuse to give a make-up exam.

There will be no early exams and no re-writes.

Regular attendance is expected.

Exam grades may be scaled up or down depending on the average and standard deviation of the grades.

Last date for withdrawal with a W instead of an F on your transcript: April 9, Thursday.

Email addresses will be used extensively to communicate with the students throughout the session. Please make sure that the e-mail address you have with the Registrar’s Office is up-to-date so that you will not miss any announcements.

9EC 308 – Spring 2015 Lecture 1

Exam Regrade Policy You will be able to see your exams and the answer key on

preannounced dates and times. You may request that your exam be regraded after you see your answers and the answer key. However, you will have to write a substantive explanation as to why you would like to have your exam regraded. It is not sufficient to write statements like “I believe I have to be awarded more points for this question.” You can only ask for an exam regrade on the preannounced dates and times on which you are supposed to see your exams and the answer key.

Any communication (via email or otherwise) after the final exam regarding your grades might affect your overall grade negatively.

10EC 308 – Spring 2015 Lecture 1

Tentative Course OutlineI. Introduction

A. Stylized Facts and Empirical Regularities of Economic Growth

II. Early Theories of Growth: Malthus and Harrod-Domar

III. Neoclassical Growth ModelsA. Solow Model and the Golden Rule of CapitalB. Neoclassical Models with Intertemporal OptimizationC. Empirics of Neoclassical Models

MIDTERM: March 31st, 2015. (Tentative Date)

IV. Endogenous Growth ModelsA. IntroductionB. First Generation Models: AK Model, Knowledge Externalities, Human

CapitalC. R&D-Based Models

V. Overlapping Generations Models

11EC 308 – Spring 2015 Lecture 1

Part 2: Empirical Facts on GrowthMeasuring Economic Growth

What is Gross Domestic Product (GDP)? A measure of all goods and services produced in a

country Is equivalent to total national income Is it a good measure of the standard of living? Comparisons across countries (Usually) use per capita income PPP (or exchange-rate) adjustments

Comparisons across time Inflation adjustments

12EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthPer Capita vs. Total GDP The economic growth of China is possibly the most significant

development of the past 20 years “The report projects that China will have the world's second

largest economy by 2025 [From CNN.com]”

But in per capita GDP terms; not even close (~13% of US GDP per capita)

Which is more important?

This depends on why we care about economic output

Military capability, international influence, etc. depend on total output

We will mostly talk about per capita income which is a better measure of standard of living

13EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthTop Ten Countries in Year 2011 According to Three

Different MeasuresHighest GDP per Capita Largest Economies Most Populous Countries

Rank CountryGDP per

Capita ($) CountryTotal GDP ($ billions) Country

Population (millions)

1 Qatar 98,948 USA 15,653 China (Mainland) 1,3402 Luxembourg 80,559 China 8,250 India 1,1823 Singapore 59,710 Japan 5,984 USA 3094 Norway 53,396 Germany 3,367 Indonesia 2375 Brunei 49,536 France 2,580 Brazil 193

6 Hong Kong 49,417 UK 2,434 Pakistan 1737 USA 48,328 Brazil 2,425 Nigeria 158

8 UAE 47,729 Italy 1,980 Bangladesh 1489 Switzerland 44,452 Russia 1,954 Russia 14210 San Marino 43,090 India 1,947 Japan 128

14EC 308 – Spring 2015 Lecture 1

Real or Nominal?Şimşek vs Rodrik:

15EC 308 – Spring 2015 Lecture 1

Standards of Living Across Countriesselected countries, 2013

Rank/Country PPP Adj. GDP per Capita Rank/Country PPP Adj. GDP per Capita

1. Qatar 103,400 WORLD 15,098

3. Singapore 62,427 69. Bulgaria 14,439

4. Norway 55,398 92. China 9,828

6. USA 52,839 133. India 3,9908. Switzerland 45,998 139. Pakistan 3,144

18. Germany 39,467 170. Haiti 1,300

35. Greece 23,631 (30,856 in ‘09) 184. Burundi 639

26. S. Korea 33,155 185. Zimbabwe 571

68. Turkey 15,263 186. Congo 381

Source: IMF Economic Outlook Database

16EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthDistribution of World Income (2005)

17EC 308 – Spring 2015 Lecture 1

Empirical Facts on Growth 1st Stylized Fact: There is enormous variation in per

capita income across economies. The poorest countries have per capita incomes that are less than 5% of per capita incomes in the richest countries.

18EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthDifferences in the Rate of Income Growth Among

Countries

GDP per Capita in Turkey, 1924-2010

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1920 1940 1960 1980 2000

GDP

per

Cap

ita

(199

0 PP

P Ad

just

ed D

olla

rs)

YearSource: Maddison Project Database

19EC 308 – Spring 2015 Lecture 1

Digression: Working with Logarithms - Ratio Scale

The previous graph looks like growth has taken off

Partly this is due to the scale

Doubling from $1000 $2000 takes half the space of doubling from $2000 $4000

Solution - graph income using a log(“ratio”) scale (or use the log of income) Now a flat line indicates a

constant growth rate

20EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthDifferences in the Rate of Income Growth Among

Countries

GDP per Capita in Turkey, 1924-2010 (Ratio Scale)

100

1,000

10,000

100,000

1920 1940 1960 1980 2000

GDP

per

Cap

ita (1

990

PPP-

Adju

sted

Do

llars

, Rat

io S

cale

)

Year

21EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthGDP per Capita in Turkey, S. Korea and the US, 1924-2010

(Ratio Scale)

100

1,000

10,000

100,000

1920 1940 1960 1980 2000

GDP

Per

Cap

ita in

Log

-Sca

le

Year

Turkey

US

S. Korea

22EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthDistribution of Growth Rates, 1970-2005

23EC 308 – Spring 2015 Lecture 1

Empirical Facts on Growth

2nd Stylized Fact: Rates of economic growth vary substantially across countries AND across time

24EC 308 – Spring 2015 Lecture 1

Empirical Facts on Growth

Approximating the Effect of Growth RatesThe rule of 72; “doubling time” - a convenient explanatory tool

doubling time =72/g where g is the growth rate

Thus, Turkish GDP per capita will double approximately every 24 years. U.S. GDP per capita will double approximately every 36 years. Korean GDP per worker will double approximately every 12 years.

Hence, over moderate periods of time, small differences in growth rates can lead to enormous differences in per capita incomes.

25EC 308 – Spring 2015 Lecture 1

Empirical Facts on GrowthWorld Inequality and Its Components, 1820–1992

26EC 308 – Spring 2015 Lecture 1

Two stylized facts above are part of Kaldor’s (1957) stylized facts of economic growth:

(1) (*) Output per worker shows continuing growth “with no tendency for a falling rate of growth of productivity.”

(2) Capital per worker shows continuing growth.

(3) The rate of return on capital is steady.

(4) (*) The capital-output ratio is steady.

(5) (*) Labour and capital receive constant shares of total income.

(6) (*) There are wide differences in the rate of productivity growth across countries.

Note: not all these stylized facts are independent:

– (SF1) and (SF4) imply (SF2) – (SF4) and (SF5) imply (SF3).

Hence, the starred facts are fundamental.

27EC 308 – Spring 2015 Lecture 1

REQUIRED READING ON THE COURSE WEBSITE:

INTRODUCTION CHAPTER of

BARRO and SALA-I-MARTIN’s GROWTH TEXTBOOK