Announcements UGBS Group22018

Lecture 2

Question

• _{Which would you prefer?}

An ordinary, middle-class Ghanaian living today, or the richest Ghanaian person in the

Country 1870 1913 1950 1979 1998 Annual % change 1870-1998

Annual % change 1950-1998

Australia 4,280 5,618 7,274 13,719 18,089 1.1 1.9

Canada 1,928 4,563 7,377 16,468 19,406 1.8 2.0

France 1,933 3,783 5,200 15,302 18,334 1.8 2.6

Germany 1,016 1,957 4,222 15,195 18,723 2.3 3.1

Italy 1,853 2,611 3,332 10,989 17,329 1.7 3.4

Japan 774 1,466 1,780 13,576 19,379 2.5 5.0

UK 2,875 4,414 6,433 12,230 16,674 1.4 2.0

Compound Interest

• _{Suppose you put $100 in a savings account for}

your retirement. How much would you have in 50 years?

• _{You need to know the interest rate.}

• _{At 1%, the savings at the end of one year will}

be: 100 + 100*.01 = 100 (1+.01) = 101.

• _{At the end of two years, the savings will be:}

Compound Interest

1% 2% 4% 8% 10%

Impact on Living Standards

• _{GDP per capita grew at a rate of 2% per year}

for US during the last 50 years.

• _{Japanese GDP per capita grew at a rate of 5%}

during the same period.

• _{Chinese GDP per capita grew about 8% per}

Real GDP per Capita

• _{Real GDP per capita is found by dividing the}

Real GDP by the population: Y/POP.

• _{We can rewrite Y/POP as Y/N times N/POP,}

since the Ns would cancel out when the two terms are multiplied.

• _{Y/N is average labor productivity.} • _{N/POP is employed portion of the}

Growth Rate of Y/POP

• _{Percentage growth of Y/POP will be equal}

to percentage growth of Y/N (Average

Labor Productivity) PLUS N/POP (Share of population employed).

• _{We can get these numbers for US from}

0 10000 20000 30000 40000 50000 60000 70000

1945 1955 1965 1975 1985 1995 2005

GDP/cap AvLabProd N/POP 0.000 0.100 0.200 0.300 0.400 0.500 0.600

US Experience and Forecast

• _{Why did N/POP increase during the last 30}

years?

• _{What is expected for the future of N/POP?} • _{How can US expect to raise average living}

Ghana’s Experience and Forecast

• _{Why did N/POP increase during the last 30}

years?

• _{What is expected for the future of N/POP?}

• _{How can Ghana expect to raise average living}

Determinants of Average Labor

Productivity

• _{Human Capital} • _{Physical Capital}

• _{Natural Resources} • _Technology

Human Capital

• _{Human capital of workers includes the}

Physical Capital

• _{Quantity and quality of machines, tools,}

equipment and buildings affect the productivity of labor.

– _{How productive is a computer programmer}

without a computer?

– _{Using MB vs. MC principle to allocate}

machinery.

– _{Diminishing returns reduces the MB for the}

Natural Resources

• _{Abundant land, energy, raw materials will}

allow inputs to be cheap for producing certain products, giving a country

comparative advantage in these products.

• _{Free trade practically frees a country from}

Technology

• _{New technologies that increase the}

productivity of labor is commonplace in our age.

• _{New ways of organizing, presenting,}

sequencing, etc. are also considered technological advances.

• _{Technological improvements in one area}

Entrepreneurship and Management

• _{Entrepreneurs take risks to introduce new}

products, new processes into the economy.

• _{Societies that provide secure property rights,}

low and predictable taxation and

independent, incorruptible legal system support the flourishing of entrepreneurial

Entrepreneurship and

Management

• _{China in the Middle Ages was far superior to}

the West technologically. However, the social system stifled economic growth: application of technology to production.

• _{Management is every day operation of the}

establishment. Education is supposed to

Political and Legal Environment

• _{It is the function of the government to}

provide an environment where individuals and firms are not subjected to arbitrary

rules, increasing the uncertainty of efforts.

• _{Enforceable contracts, well-defined property}

rights, political and social environment

conducive to taking risks in production are responsibilities of governments.

Worldwide Productivity Slowdown

• _{Starting with 1973, industrialized nation}

experienced a significant productivity slowdown.

• _{Slow growth brings social problems.}

Why Did Productivity Slow Down?

• _{Decline in public education?} • _{Oil price shocks?}

• _{Poor measurement of productivity gains in}

service sector?

• _{The exceptional experience of the 50s and}

Costs of Economic Growth

• _{Resources allocated to capital formation will}

reduce production of consumer goods.

• _{Unsanitary, unsafe conditions for industrial}

workers (historical for US, current for many LDCs).

• _{Is the sacrifice today, worth better living}

How to Increase Growth Rates?

• _{The factors that determine average labor}

Policies to Increase Human Capital

• _{Education increases human capital.}

• _{Why does the government provide “free” K-12}

education?

– _{Positive externalities: Private demand does not}

capture all the societal benefits.

Policies to Promote Saving and Investment

• _{Capital stock in a country increases through}

investment activities.

• _{Investments require resources diverted from}

consumption goods to capital goods.

• _{If consumers do not restrict their consumption}

(if they don’t save) total expenditures will

Policies to Promote Saving and Investment

• _{High rates of saving allow a country to channel}

resources into capital formation.

• _{Governments can pass laws to promote saving}

and laws to promote investment.

• _{Governments also can create capital stock}

Policies to Support R&D

• _{Public good aspect of knowledge reduces}

private investment in knowledge.

• _{Collective decision-making is required for}

Legal and Political Framework

• _{Political stability}

• _{Free and open exchange of ideas} • _{Secure property rights}

• _{Well functioning legal system}

• _{Free markets (except for those with significant}

Limits to Growth?

• _{Will we run out of oil (natural resources)?}

– _{Market mechanisms: price incentives}

• _{Will we spoil the environment completely?}

– _{Change in tastes and preferences}

• _{Can we solve the global warming problem?}

Commodity Prices

FIRST published in 1864, with figures stretching back to 1845, The Economist's commodity-price index is probably the world's oldest regularly published price index. Since October 2001, our dollar-based

industrials index has risen by 76%, fuelled by Chinese demand for raw materials and, in part, the weakness of the dollar. Yet in real terms, industrial commodity prices are a mere 30% of their value in 1845