topic 7
TRANSCRIPT
C H A P T E RC H A P T E RChapterChapterPowerPoints to accompany
Macroeconomics
2TOPIC 7 (Chapters 12-13)
Technology, population growth and the Solow model; ‘new’ vs ‘old’ economies; IT and growth; technology & unemployment
C H A P T E RC H A P T E RChapterChapter
Technological Progress and Growth
1212
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 3
Technological Progress and the Rate of Growth
Technological progress has many dimensions. It may mean:
Larger quantities of outputBetter productsNew productsA larger variety of products
Technological progress leads to increases in output for given amounts of capital and labour.
12-1
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 4
Technological Progress and the Production Function
Let’s denote the state of technology by A and rewrite the production function as
Y F K N A= ( , , )(+ + +)
A more restrictive but more convenient form isA more restrictive but more convenient form isY F K AN= ( , )
Output depends on both capital and labour, Output depends on both capital and labour, and on the state of technology.and on the state of technology.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 5
Technological Progress and the Production Function
Technological progress reduces the number of workers needed to achieve a given amount of output.Technological progress increases AN, which we can think of as the amount of effective labour, or labour in “efficiency units.” in the economy.With constant returns to scale,
2 2 2Y F K AN= ( , )
More generally,More generally,xY F xK xAN= ( , )
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 6
Technological Progress and the Production Function
The relation between output per effective worker and capital per effective worker is:
t t
t t t t
Y KfA N A N
⎛ ⎞= ⎜ ⎟
⎝ ⎠In words, output per effective worker at time t is a In words, output per effective worker at time t is a function of capital per effective worker.function of capital per effective worker.
YAN
FK
AN=
⎛⎝⎜
⎞⎠⎟,1
which we can redefine aswhich we can redefine as
Note that the growth rate of Note that the growth rate of ‘‘effective effective labourlabour’’ is is ggAA +g+gNN
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 7
Technological Progress and the Production Function
Output per Effective Worker Versus Capital per Effective Worker
Because of decreasing returns to capital, increases in capital per effective worker lead to smaller and smaller increases in output per effective worker.
f(K/AN)
K/AN
Y/A
N
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 8
Interactions Between Output and Capital
The dynamics of output and capital per worker involve:1. The relation between output per effective worker and
capital per effective worker.
I S sY= =
t t
t t t t
I YsA N A N
⎛ ⎞= ⎜ ⎟
⎝ ⎠
Dividing both sides by Dividing both sides by ANAN, we get, we get
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 9
Interactions Between Output and Capital
2. The relation between investment per effective worker and capital per effective worker.
The dynamics of output and capital per worker The dynamics of output and capital per worker involve:involve:
YAN
fK
AN=
⎛⎝⎜
⎞⎠⎟
Given thatGiven that IAN
sfK
AN=
⎛⎝⎜
⎞⎠⎟
thenthen
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 10
Interactions Between Output and Capital
3. The investment needed to maintain capital per effective worker from depreciation and growth of effective workers.
The dynamics of output and capital per worker The dynamics of output and capital per worker involve:involve:
( )δ + +g g KA Nor equivalentlyor equivalently
( )δ + +g gK
ANA N
The amount of investment per The amount of investment per effectiveeffective worker needed to worker needed to maintain a constant level of capital per maintain a constant level of capital per effectiveeffective worker isworker is
KggK NA )( ++δ
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 11
Dynamics of Capital and Output
At (K/AN)0, actual investment exceeds the investment level required to maintain the existing level of capital per effective worker, K/ANincreases.In the long run, or in the steady state of the economy, capital per effective worker and output per effective worker are constant and equal to (K/AN)* and (Y/AN)*.
gN )K/AN
f(K/AN)
sf(K/AN)
K/AN
Y/A
N
(K/AN)0 (K/AN)*
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 12
Dynamics of Capital and Output
In steady state, output (Y) grows at the same rate as effective labour (AN); effective labour grows at a rate (gA+gN); therefore, output growth in steady state equals (gA+gN). Capital also grows at a rate equal to (gA+gN).The growth rate of output is independent of the saving rate.Because output, capital, and effective labour all grow at the same rate, (gA+gN), the steady state of the economy is also called a state of balanced growth.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 13
Dynamics of Capital and Output
Table 12-1 The Characteristics of Balanced Growth
Rate of growth of:1 Capital per effective worker 0
2 Output per effective worker 03 Capital per worker gA
4 Output per worker gA
5 Labour gN
6 Capital gA + gN
7 Output gA + gN
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 14
The Effects of the Saving Rate
The Effects of an Increase in the Saving Rate: IAn increase in the saving rate leads to an increase in the steady-state levels of output per effective worker and capital per effective worker.
f(K/AN)gN )K/AN
s1 f(K/AN)s0 f(K/AN)
Y/A
N
K/AN(K/AN)0 (K/AN)1
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 15
The Effects of the Saving Rate
The Effects of an Increase in the Saving Rate: IIThe increase in the saving rate leads to higher output growth until the economy reaches its new, higher, balanced growth path.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 16
The effects of the higher depreciation, technological progress or population growth
Higher gA or gN increase the rate of growth of output in steady state. Why?
Higher δ, gA or gN reduce output and capital per effective worker in steady state. Why?
Standard of living improves with higher gA , but deteriorates with higher δ or gN . Why?
Fall in population growth in Africa (through AIDS, wars etc) will lead to a a higher standard of living of survivors in the long run! Why?
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 17
The Determinants of Technological Progress
Technological progress in modern economies is the result of firms’ research and development (R&D)activities. The outcome of R&D is fundamentally ideas.Australian firms appear to be lagging in R&D.
Australia spends 1.5% of GDP on R&D (low compared to US, France, UK, Germany & Japan)30% of about 95,000 R&D personnel are employed by firms in Australia. (In US, 75%of 1 million).Australian firms spend 11% of gross investment on R&D. (In US, 20%).
Spending on R&D depends on:The fertility of the research process, or how spending on R&D translates into new ideas and new products, andThe appropriability of research results, or the extent to which firms benefit from the results of their own R&D.
12-2
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 18
The Fertility of the Research Process
The determinants of fertility include:The interaction between basic research (the search for general principles and results) and applied research (the application of results to specific uses).The country: some countries are more successful at basic research; others are more successful at applied research and development.Time: It takes many years, and often many decades, for the full potential of major discoveries to be realized.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 19
The Appropriability of Research Results
If firms cannot appropriate the profits from the development of new products, they will not engage in R&D. Factors at work include:
The nature of the research process. Is there a payoff in being first at developing a new product?Legal protection. Patents give a firm that has discovered a new product the right to exclude anyone else from the production or use of the new product for a period of time.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 20
The Facts of Growth Revisited
Capital Accumulation Versus Technological ProgressFast growth may come from two sources:
A higher rate of technological progress, gA
Adjustment of capital per effective worker, K/AN, to a higher level.
12-3
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 21
Capital Accumulation Versus Technological Progress
Technological progress accounted for most growth
1950-1973 (1)
1974-2004 (2)
CHANGE (3)
1950-1973 (4)
1974-2004 (5)
CHANGE (6)
Australia 2.3 1.5 -0.8 1.2 1.3 0.1France 4.5 1.7 -2.8 4.0 1.3 -2.8Japan 7.4 2.2 -5.2 6.9 1.3 -5.6United Kingdom 2.5 1.8 -0.6 1.7 1.6 -0.1United States 1.8 1.5 -0.4 1.9 1.1 -0.7Average 3.7 1.7 -2.0 3.1 1.3 -1.8
TABLE 12.2 AVERAGE ANNUAL GROWTH PER WORKER AND TECHNOLOGICAL PROGRESS IN FIVE RICH COUNTRIES, 1950-2004
RATE OF TECHNOLOGICAL PROGRESS (%)GROWTH OF OUTPUT PER WORKER (%)
"Average" is a simple average of the growth rates in each column. "Rate of technological progress" is weighted growth rates of labour and capital subtracted from output growth, divided by a fixed labour share of .7. The data for Japan begins in 1955.
SOURCES: ABS, BEA, BLS, OECD, Angus Maddison"Dynamic Forces in Capitalist Development" (New York: Oxford University Press, 1991).
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 22
Capital Accumulation Versus Technological Progress
Table 12-2 illustrates three main facts:1. The period of high growth of output per capita, from
1950 to 1973, was mostly due to rapid technological progress, not to unusually high capital accumulation.
2. Apart from Australia & UK, the slowdown in growth of output per capita since 1973 has come mainly from a decrease in the rate of technological growth, not from unusually low capital accumulation.
3. Convergence of output per capita across countries has come from higher technological progress rather than from faster capital accumulation.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 23
Epilogue: The Secrets of Growth
Differences in output per worker between rich and poor countries are mostly attributed to differences in the measured level of technology across countries. For various reasons, poor countries are unable to close this technology gap.
Reasons include political instability, poorly established property rights, lack of entrepreneurs, and poorly developed financial markets.
12-4
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 24
Epilogue: The Secrets of Growth
The poor countries that have grown rapidly in the last 20 years have experienced a rapid accumulation of both physical and human capital.The contributions of both technological progress and capital accumulation to growth depend on the quality of institutions in a country.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 25
Institutions Matter for Growth!
Good institutions: - protection from expropriation - judicial system resolves disputes quickly - laws against insider trading - reliable patent laws - credible anti-trust laws
0
2000
4000
6000
8000
10000
12000
14000
1950 1960 1970 1980 1990 1998
1996
US
dolla
rs
South Korea
North Korea
South Korea relied on a capitalist organization of the economy, with strong state intervention, but also private ownership and legal protection of private producers. North Korea relied on central planning. Growth of GDP per capita was very different!
GDP per capita
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 26
Hong Kong, Singapore
Many similarities –• Ex-British colonies, city-states, post-war S China immigrants
• Trading ports with similar industries, but Singapore lagged HK by a decade in its sequence.
Many differences -• HK – minimal government intervention – provided infrastructure and land for
expansion
• SNG – much intervention - I/Y rose from 9% in 1960 to 43% in 1984; forced saving, industrial policy using tax incentives
• gY/N 1970-90: HK = 2.4%, SNG = 1.5%
• gA : HK = 2.3%, SNG = 0.1%
Why the difference? Alwyn Young: SNG moved too fast from one industry to the next – unbalanced growth! Too little gA. . SNG has since taken heed, and has grown well since mid-1990s
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 27
Institutions matter! Comparing with China and Taiwan
GDP PER CAPITA (PPP-ADJUSTED) 1950-2001SOURCE: Angus Maddison, The World Economy: Historical Statistics, OECD 2004
0
5000
10000
15000
20000
25000
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
1999
US
$, P
PP-a
djus
ted
HONG KONG
SINGAPORE
TAIWAN
CHINA
China adopted state planning and communist institutions.
HK, SNG and Taiwan chose the capitalist path with well-enforced property rights.
China became relatively poorer from 1950, and now has a lot of catching-up!
C H A P T E RC H A P T E RChapterChapter
Technological Progress, Wages, and Unemployment
1313
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 29
Dimensions of Technological Progress
QUESTION: Does technology improvement lead to unemployment?
ANSWER: Higher unemployment can only occur in short run, if at all. In medium run, unemployment might even fall!
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 30
Dimensions of Technological Progress
Technological progress allows more output from the same number of workers2 interpretations:
Optimistic: More output with the same workersPessimistic: Same output with fewer workers
Technological unemployment—a concept associated with the technocracy movement during the Great Depression and the Luddites in the 19th
century—is the argument that unemployment comes from the introduction of machinery.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 31
Dimensions of Technological Progress
Technological progress leads to the production of new goods and the disappearance of old ones.The process of growth is fundamentally a process of creative destruction. With technological progress comes a process of job creation and job destruction.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 32
Productivity, Output, and Unemployment in the Short Run
A production function with technological progress can be written as:
Y F K AN= ( , )
Leaving aside matters concerning capital, then:Leaving aside matters concerning capital, then:Y AN=
Output is produced using only labour, Output is produced using only labour, NN, and , and each worker produces each worker produces AA units of output. units of output. Increases in Increases in AA represent technological progress.represent technological progress.
13-1
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 33
Productivity, Output, and Unemployment in the Short Run
Then, employment is equal to output divided by productivity, A.
NYA
=
The concern is that, given output, an increase in The concern is that, given output, an increase in productivity decreases the level of employment. productivity decreases the level of employment. This chapter explores this issue, in particular, This chapter explores this issue, in particular, the shortthe short-- and mediumand medium--run responses of output, run responses of output, employment, and unemployment.employment, and unemployment.
ANANKFY == ),(
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 34
Technological Progress, Aggregate Supply, and Aggregate Demand
Aggregate Supply and Aggregate Demand for a Given Level of ProductivityThe aggregate supply curve is upward sloping. An increase in output leads to an increase in the price level. The aggregate demand curve is downward sloping. An increase in the price level leads to a decrease in output.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 35
Technological Progress, Aggregate Supply, and Aggregate Demand
The impact of an increase in productivity on output and employment in the short run depends on how it affects the aggregate supply and aggregate demand curves.
Higher productivity decreases the amount of labour needed to produce a unit of output, resulting in lower cost and a lower price for a given output level. The aggregate supply curve shifts down.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 36
Technological Progress, Aggregate Supply, and Aggregate Demand
The effects of higher productivity on aggregate demand in the short run depend on the source of the productivity increase:
Technological breakthroughs will bring prospects of higher profits and a boom in investment. The demand for goods rises— aggregate demand shifts to the right.The more efficient use of existing technologies may require little or no new investment. Worries about job security will trigger more saving—the aggregate demand curve shifts to the left.
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 37
Technological Progress, Aggregate Supply, and Aggregate Demand
The Effects of an Increase in Productivity on Output in the Short RunAn increase in productivity shifts the aggregate supply curve down. It has an ambiguous effect on the aggregate demand curve, which may shift to the left or to the right. In this figure, we assume a shift to the right, which leads tohigher output in the short run. (But effect is ambiguous)
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 38
Does technology improvement reduce the natural rate of unemployment?
Price Setting:Price Setting:A
W)1(P μ+=
If A increases, W/A falls, which lowers P given W.
Wage Setting:Wage Setting: ]z,u[FPAW ee=
Ae = the expected level of productivity is incorporated into wages set in bargaining.
NB With Y=AN, 1 unit of output is produced by 1/A workers. So the cost of producing 1 unit of output = W (1/A) = W/A
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 39
AW)1(P μ+=
Therefore
]z,u[FAPW
=
In medium run, Ae = A & Pe = P.
μ+=
11]z,u[F n
So un is independent of A
Does technology improvement reduce the natural rate of unemployment?
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 40
However un in the medium and long run does not depend on the level or rate of growth of productivity
u in the short run may be affected by the level or rate of growth of productivity. It may go up or down
Summary: Technological progress and unemployment
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 41
The Empirical Evidence: Productivity growth and output growth
In Australia, there is a positive relation between output growth and productivity growth.But be careful: correlation is not the same as causation
-6
-4
-2
0
2
4
6
8
10
12
1965 1970 1975 1980 1985 1990 1995 2000 2005
Annu
al ra
te o
f cha
nge
(%)
Output growth
Productivity growth
Research on the effects of Research on the effects of exogenousexogenous movements in productivity growth on movements in productivity growth on output shows that:output shows that:
-- Sometimes increases in productivity lead to increases in outputSometimes increases in productivity lead to increases in output sufficient to maintain or even sufficient to maintain or even increase employmentincrease employment in the in the short runshort run..
-- Sometimes they do not, and Sometimes they do not, and unemployment increasesunemployment increases in the in the short runshort run..
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 42
The Empirical Evidence: The Medium Run
Productivity Growth and Unemployment in Australia—Averages by Decade, 1901-2005
There is little relation between the 10-year averages of productivity growth and the 10-year averages of the unemployment rate. If anything, higher productivity growth is associated with lower unemployment, in the medium run.
1951-1960
1960-19691970-1979
1920-1929
1990-1999
1901-19091980-1989
1940-1949
1930-1939
1910-1919
2000-05
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 2 4 6 8 10 12 14
Average unemployment rate (%)
Ave
rage
ann
ual l
abou
r pro
duct
ivity
gro
wth
(%)
© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 43
Why did Australia do so well from the 2nd half of the 1990s?
Labour productivity surged leading to high Y growth, falling u and low inflation. Why?
• A series of microeconomic reforms from 1980s onwards
• Australia had a very high uptake of new ICT technologies
• However real wages have not kept pace with labour productivity growth, implying that profits have benefitted!
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005GDP growth 3.5 4.2 3.9 4.9 4.3 3.3 2.2 4.0 3.0 3.5 2.4Unemployment rate 8.1 8.0 8.2 7.9 6.7 6.2 6.9 6.5 6.2 5.6 5.0Inflation rate 1.8 2.1 1.3 0.5 0.5 4.1 4.0 2.6 0.9 0.9 0.7Labour productivity growth 0.6 3.3 3.0 2.9 3.9 1.3 0.3 2.6 1.4 1.9 -0.6
TABLE 1 SELECTED AUSTRALIAN MACROECONOMIC VARIABLES