Scribd
Upload
10 views

CCCH9007 Lecture3

The document provides an introduction to macroeconomics and growth accounting. It discusses key macroeconomic variables and how they are measured, including GDP, inflation, and unemployment. It also covers models of economic growth, such as the Solow growth model, and how growth can be accounted for and influenced by factors like technological progress, investment rates, and population growth.

Uploaded by

lizzyli12062001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
10 views

CCCH9007 Lecture3

The document provides an introduction to macroeconomics and growth accounting. It discusses key macroeconomic variables and how they are measured, including GDP, inflation, and unemployment. It also covers models of economic growth, such as the Solow growth model, and how growth can be accounted for and influenced by factors like technological progress, investment rates, and population growth.

Uploaded by

lizzyli12062001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 36

Introduction to Macroeconoics and Growth

Accounting

Professor Xiaodong Zhu

February 9, 2022
What is macroeconomics?

• Miroeconomics: study of the behavior of individual households


and firms

• Macroeconomics: study of the aggregate economy


Important aggregate variables

• GDP

• Inflation

• Unemployment
US GDP per capita
Inflation in US
US unemployment rate
China’s GDP growth and inflation
How are macroeconomic aggregates measured?

National Income and Product Accounts (NIPA)

• Developed by Simon Kuzents in the 1930s at the request of


the US
• Department of Commerce Kuzenets was awarded Nobel Prize
in 1971 for the work

• Used by most countries, including China


Gross Domestic Product (GDP)

Measured in three different, but equivalent ways:

1. Production approach: total output of goods and services


produced in the economy

2. Expenditure approach: total expenditures on goods and


services in the economy

3. Income approach: total income of everyone in the economy


GDP and its components
The circular flow
Calculating GDP: Production approach

• Use prices to calculate values of different goods and services


• e.g. adding apples and oranges
• price of apples × quantity of apples + price of oranges ×
quantity of oranges
• Use value added to avoid double counting, value
added=revenue–cost of intermediate input
• e.g. value of a MacDonald hamburger
• price of hamburger - price of buns and beefs
Nominal vs Real GDP

• Nominal GDP: total value of goods and services calculated


using current prices

• Real GDP: total value of goods and services calculated using


constant base year prices
US Nominal and Real GDP
Real GDP in local prices and in international prices (PPP)

• Real GDP in local prices: total value of goods and services


calculated using constant base year local prices. converted into
US dollars

• Real GDP in international prices (PPP): total value of goods


and services calculated using constant base year international
prices
Calculating GDP: Income approach

GDP is the sum of four items

1. Employee’s compensation: wages, salaries, and fringe benefits

2. Profits, and rental and interest income

3. Depreciations

4. Production taxes
Calculating GDP: Expenditure approach

An important identify for GDP Y :

Y = C + G + I + NX

1. C = Private Consumption

2. G = Government consumption

3. I = Investment (capital formation)

4. NX = Exports - Imports
Solow growth model

• Aggregate output Y is a function of capital stock K and labor


force L
Y = F (K , L) = AK α L1−α
• Output per worker

y = Y /L = A (K /L)α = Ak α = f (k)

• Investment per worker: i = sf (k), s is the investment rate


• Capital depreciation: δk, δ is the depreciation rate
• Change in capital per worker = investment - depreciation

∆k = sf (k) − δk
Decreasing marginal product of capital (MPK)

• The MPK, the additional amount of output produced by adding one unit
of capital, is a decreasing function of the existing capital per worker
Output, consumption, and investment

• s is the real investment rate


Change in capital stock per worker

∆k = sf (k) − δk
No sustained growth without technological progress

Without technological progress:


• Output per worker and capital per worker both converge to
some constants
• If current capital stock is very low, the economy will
experience rapid growth temporarily
• But growth rates will gradually decline to zero
• No sustained growth in the long run
Post-war growth in Japan, Germany, and former Soviet
Union

• For all three countries, a large amount of capital stock were


destroyed during the World War II, so capital per worker was
very low in 1945
• All of them grow rapidly right after the war, just like what the
Solow model predicts
• However, growth eventually disappeared in former Soviet
Union, despite high investment rates
Influence of saving/investment rate

• An increase in the investment rate s will lead to temporary growth and a


permanently higher income level
Investment rate and per capita income
Population growth and technological progress
• Assume that popoluation grows at a constant rate:

∆L
n=
L
• Technological progress helps to increase the efficiency level of
labour E :
Y = F (K , L × E )
• Rato of technological progress:

∆E
g=
E
• Growth of effective units of labour, E × L:

∆ (L × E ) ∆L ∆E
= + =n+g
L×E L E
Tecnological progress in Solow model

Some more notation:


Y
• y = L×E output per efficiecy unit of labour
Y
• k = L×E capital stock per efficiency unit of labour

y = f (k)

• saving and investment rate per efficiency unit of labour

sy = sf (k)
Break-even investment

(δ + n + g ) k = break-even investment: the amount of investment


necessary to keep k constant. Consists of:
• δk to replace depreciating capital
• nk to provide capital for new workers
• gk to provide capital for the new “effective” workers created by
technological progress
Output, consumption, and investment

• capital stock per effiiciency unit of labour again converges to a steady


state k ∗
Technological progress as the only driver of long-run growth

• In the steady state,

K = k ∗ (L × E ) , Y = f (k ∗ ) (L × E )

• So both capital stock and GDP grow at the same rate n + g ,


the population growth rate plus the rate of technological
progress
• Even without increase in the investment rate s, capital stock
grows with labour input and labour efficiency
• Capital stock per worker and GDP per worker grow at the rate
g
• Long-run growth is driven by technological progress only
An accounting framework
• GDP is a function of production inputs, capital and labor, and
a variable called TFP–total factor productivity

Yt = At Ktα (ht Lt )1−α = Ktα (Lt × Et )1−α

• Here, Kt is the aggregate physical capital stock, ht is the


average level of human capital (labor quality), Lt is the
aggregate employment (labor quantity),
1
Et = At1−α ht

• and At is the TFP, which measures how effeciently the capital


and labor inputs are used in producing GDP. Its level depends
on
• Technology used
• Efficiency of resource allocation
Growth accounting
An accounting framework
• GDP is a function of (capital and labor) inputs and a term
called TFP–total factor productivity
Yt = At Ktα (ht Lt )1−α

ln (Yt ) = ln (At ) + αln(Kt ) + (1 − α)ln (ht Lt )


For any variable, xt , define gx = 4ln (xt ) = ln (xt+1 ) − ln (xt ),
then,

gY = gA + αgK + (1 − α) (gh + gL )
TFP A is difficult to measure directly, but output, capital stock and
labour input can be measured. Infer TFP growth from the equation
above

gA = gY − αgK − (1 − α) (gL + gh )
Here, 1 − α = labor income share, which is around 2/3 in the US
Growth accounting for US

gY gK gHL gTFP 1−α


1950-2014 3.11 3.03 1.91 0.83 0.67
1950-1973 3.95 3.82 2.42 1.07 0.67
1973-1993 2.81 2.81 2.10 0.48 0.67
1993-2007 3.19 2.92 1.64 1.13 0.67
2007-2014 1.01 1.27 0.28 0.40 0.67
Asian miracles?

In the mid-90s, the World Bank issued a report entitled “Eastern


Asian Miracles”
• Miracles created by appropriate government interventions

Around the same time, some careful data work by Alwyn Young and
a popular writing by Paul Krugman in Foreign Affairs magazine:
• Maybe there was no Asian Miracle
Growth accounting for four East Asian economies

Estimates by Alwyn Young:

gY gK gHL gTFP 1−α


Hong Kong (66-91) 7.3 8.0 3.2 2.3 0.63
Korea (66-90) 10.3 13.7 6.4 1.7 0.70
Singapore (66-90) 8.7 11.5 5.7 0.2 0.51
Taiwan (66-90) 9.4 12.3 4.9 2.6 0.74
Average growth rates in China
Simple growth decomposition

You might also like