low soo peng world economics

7/28/2019 Low Soo Peng World Economics

1/15

The World Economy

Total GDP (2012): $83T

Population (2012):7B

GDP per Capita (2012): $12,500 Population Growth (2012): 1.1%

GDP Growth (2012): 3.3%

GDP per capita is probably the best measure of a countrys overall well

being


2/15

Region GDP % of

WorldGDP

GDP Per

Capita

Real GDP

Growth

United States $15T 18% $48,000 1.3%

European Union $16T 19% $33,000 1.0%

Japan $4.3T 6% $34,200 -.4%

China $7.8T 11% $6,000 9.8%

India $3.2T 5% $2,800 6.6%

Ethiopia $66.3B .09% $800 8.5%

Note. However, that growth rates vary significantly across countries/regions. Doyou see a pattern here?

Source: CIA World Factbook


3/15

At the current trends, the standard of living in China will surpass that of theUS in 25 years! Or, will they?

PerCapitaIn

come

That is, can China maintain its current growth rate?
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4/15

Income GDP/Capita GDP Growth

Low $510 6.3%

Middle $2,190 7.0%

High $32,040 3.2%

As a general rule, low income (developing) countries tend to havehigher average rates of growth than do high income countries

The implication here is that eventually, poorer countries shouldeventually catch up to wealthier countries in terms of per capita income

a concept known as convergence


5/15

Some countries, however, dont fit the normal pattern of development

SudanGDP: $80B (#80)GDP Per Capita: $2,400 (#184)

GDP Growth: -11.2% (#219)

QatarGDP: $150B (#59)GDP Per Capita: $179,000 (#1)

GDP Growth: 16.3% (#1)

So, what is Sudan doing wrong? (Or, what is Qatar doing right?)

At current trends, Per capita income in Qatar will quadruple to$716,000 over the next decade. Over the same time period, percapita GDP in Sudan will drop by roughly 40%to $670!!!


6/15

To understand this, lets look at the sources of economic growth.where

does production come from?

LKAFY ,,Real GDP

is a function of

Productivity Capital

Stock

Labor

Real GDP = Constant Dollar (Inflation adjusted) value of all goods andservices produced in the United States

Capital Stock = Constant dollar value of private, non-residential fixed assets

Labor= Private Sector Employment

Productivity = Production unaccounted for by capital or labor


7/15

A convenient functional form for growth accounting is the Cobb-Douglasproduction function. It takes the form:

LAKYwhere 1

With the Cobb-Douglas production function, the parameters haveclear interpretations:

Capitals share of income (what %

of total income in the US accrues toowners of capital)

Labors share of income (what % of

total income in the US accrues toowners of labor)

Elasticity of output with respect tocapital (% increase in outputresulting from a 1% increase incapital)

Elasticity of output with respect tolabor (% increase in output resultingfrom a 1% increase in labor)


8/15

3

2

3

1

LAKY

Suppose we have the following Cobb-Douglas production function:

A 1% rise in

employment raisesGDP by 2/3%

A 1% rise in capital

raises GDP by 1/3%

We can rewrite the production function in terms of growth rates todecompose GDP growth into growth of factors:

LKAY %32

%3

1%%

Real GDP Growth(observable) Employment

Growth(observable)

Capital Growth(observable)

Productivity Growth(unobservable)


9/15

Year Real GDP (Billions of2000 dollars)

Real Capital Stock(Billions of 2000 dollars)

Employment (thousands)

1939 1,142 1,440 29,923

2006 11,257 12,632 135,1552007 11,467 12,883 137,180

Lets decompose some recent data first

85.1100*257,11ln467,11ln% Y

97.1100*632,12ln883,12ln% K

48.1100*155,135ln180,137ln% L

Note that capital isgrowing faster thanemployment

20.48.13

297.1

3

185.1% A


10/15

Year Real GDP (Billions of2000 dollars)

Real Capital Stock(Billions of 2000 dollars)

Employment (thousands)

1939 1,142 1,440 29,923

2006 11,257 12,632 135,155

2007 11,467 12,883 137,180

Now, lets look at long term averages

39.3100*

68

142,1ln467,11ln%

Y

22.3100*

68

440,1ln883,12ln%

K

23.2100*68

923,29ln180,137ln

%

L

84.23.23

222.3

3

139.3% A


11/15

1939 - 1948 1948 - 1973 1973-1993 1993-2007

Output 5.79 4.10 1.96 2.63

Capital 3.34 4.24 2.10 2.94

Labor 4.46 2.10 1.86 1.60Productivity 1.71 1.28 0.02 0.59

A few things to notice:

Real GDP growth is declining over time.

Capital has been growing faster than labor

The contribution of productivity is diminishing!

Contributions to growth from capital, labor, and technology vary across timeperiod


12/15

Our model of economic growth begins with a production function

Real GDP

Productivity Capital

Stock

Labor

Given our production function, economic growth can resultfrom

Growth in Labor

Growth in the capital stock Growth in Productivity

3

2

3

1

LAKY


13/15

We are concerned with capital based growth. Therefore, growth in productivityand employment will be taken as given

Productivitygrows at rate

AgPop

PopLF

LFLL

Populationgrows at rate

Lg

Employment

Labor Force = Employment Ratio

( Assumed Constant)

Labor ForcePopulation

= Participation rate

( Assumed Constant)

3

2

3

1

LAKY


14/15

Our simple model of economic growthbegins with a production function withone key property

Y

K

),,( LKAF

As the capital stockincreases (given a fixedlevel of employment), theproductivity of capitaldeclines!!

K

YMPK

Change in Capital Stock

Change in Production

An economy cant grow through capital accumulation alone forever!

3

2

3

1

LAKY

K

Y

K

Y


15/15

Everything in this model is in per capita terms

3

2

3

1

LAKY Divide both sides by labor to represent our variables inper capita terms

3

13

1

3

2

3

1

3

2

3

1

AkLKA

LL

LAKLYy

Capital Per Capita

Productivity

Per capita

output

In general, lets assume lower case letters refer to per capita variables

low soo peng world economics

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