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Principles of Macroeconomics 3250:201

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Principles of Macroeconomics3250:201

Richard W. Stratton

- 6 graded assignments this week
- Homework 07, 08, 09, 10
- Essay 02
- CBT Test 03 (Friday - Monday)

- 4 graded assignments next week
- Homework 11, 12
- Essay 03
- CBT Test 04 (Friday - Monday)

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Decision Tree

Decision Tree

Student questions

Measuring Growth

Determinants of Economic Growth

Theories of Growth

Worksheet 07 Economic Growth

Q8

Q11

Q15

- Compare and discuss questions on worksheet or chapter 10
- write down top 5 questions for the Group

- Class
- Discuss questions rotating among Groups

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Decision Tree

Student questions

Measuring Growth

Determinants of Economic Growth

Theories of Growth

Worksheet 07 Economic Growth

Q8

Q11

Q15

- Calculation of Growth Rate for 2001

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- Step 1 – Calculate Real GDP

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- Step 2 – Calculate Growth Rate

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- Step 2a – Calculate Growth Rate

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The standard of living depends on

- Real GDP per person
Real GDP per person =

Real GDP divided by the population

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Growth of real GDP per person

Growth rate of real GDP

Growth rate of population

=

–

Growth of real GDP per person

=

5 percent – 1 percent

= 4 percent.

The growth rate of real GDP per person can be calculated by using the formula:

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Decision Tree

Student questions

Measuring Growth

Determinants of Economic Growth

Theories of Growth

Worksheet 07 Economic Growth

Q8

Q11

Q15

“… the limits to growth on this planet will be reached sometime within the next 100 years. The most probable result will be a sudden and uncontrollable decline in both population and industrial capacity.”

Comment

(The Limits to Growth, Meadows et al.; Universe, 1972)

#17

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What causes growth?

Is growth sustainable?

Assume GDP is produced using three categories of inputs – labor, capital, and raw materials.

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- If the number of aggregate hours of labor used increased, real GDP would ____________.
- If the capital used in production increased, real GDP would ____________.

increase

increase

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- If the amount of raw materials used in production increased, real GDP would _____________.
- If labor productivity increased and the number of aggregate hours remained the same, real GDP would _____________.

increase

increase

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Axes?

Real

GDP

Aggregate Production

Aggregate Hours

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Increase aggregate hours

Real

GDP

Aggregate Production

Aggregate Hours

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Increase use of capital

Real

GDP

Aggregate Production

Aggregate Hours

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Increase of raw materials

Real

GDP

Aggregate Production

Aggregate Hours

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Increase labor productivity

Real

GDP

Aggregate Production

Aggregate Hours

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Extensive and Intensive Growth

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- Are there limits to extensive growth?
- Are there limits to intensive growth?

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Decision Tree

Student questions

Measuring Growth

Determinants of Economic Growth

Theories of Growth

Worksheet 07 Economic Growth

Q8

Q11

Q15

Growth Theories –

- Compare and contrast
- Classical growth theory
- Neo-classical growth theory
- New growth theory

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- Are there limits to growth?
- Are there limits to extensive growth?
- Are there limits to intensive growth?

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Classical Growth Theory

- Increased productivity
- Increased GDP
- Reduced deaths and increased births
- Increased population
- Decrease in GDP per person
- Population growth limits increases in human welfare

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Classical – Key features

- Increases in labor productivity are random and temporary
- Changes in birth rate and life expectancy primary determinants of population
- Increases in population limited by subsistence level

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Classical Growth Theory – Prediction

- Global Economy stagnates at subsistence level

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Neo-Classical Growth Theory

- Technological advances
- Increased labor productivity
- Increase GDP
- Reduce deaths
- Reduce birth rates (women’s opt. cost)
- Growth rate = population growth + productivity growth + accumulation of human capital

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Neo-Classical – Key features

- Technological advances occur by chance, but are sustainable
- Change in population influenced by death rate & birth rate declines
- Growth rate = population growth + productivity growth + accumulation of human capital

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Neo-Classical – Prediction

- Global Economy grows at a rate equal to technological change. National economies tend to converge.

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New Growth Theory

- Education, R&D, & profit determine technological advances
- Increased labor productivity
- Increase GDP per person
- Reduce death rates
- Reduce birth rates (women’s opt. cost)

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New Theory – Key features

- Decisions on education, R&D, and profit potential determine the rate of technological advance
- Change in population influenced by death rate & birth rate declines
- Growth rate = population growth + productivity growth + accumulation of human capital

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New Theory – Prediction

- National economies grow at rates dependent on incentives (save, invest, etc.)
- They will not necessarily converge.

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Decision Tree

Student questions

Measuring Growth

Determinants of Economic Growth

Theories of Growth

Worksheet 07 Economic Growth

Q8

Q11

Q15

- Which of the following is likely to increase the poverty in a country?
- A decrease in population over time.
- A decrease in the real GDP growth rate over time.
- A decrease in the inflation rate over time.
- An increase in the real GDP per person growth rate over time.

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- If the U.S. population grew at a 0.9 percent during 1999 and real GDP grew at a 4.4 percent during the same period, what was the growth rate of real GDP per person?
- –3.5 percent
- 3.5 percent
- 4.0 percent
- 5.3 percent

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- Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were employed. This year real GDP is $100 million and 950,000 workers are employed. Hence, labor productivity has
- increased.
- decreased.
- remained constant.

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- If Country A’s real GDP grows at a rate of 14 percent per year, how many years will it take for Country A’s real GDP to double ?
- 5
- 7
- 10
- 30

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- Neoclassical growth theory predicts that real GDP will
- remain at the subsistence level.
- grow at a rate that is determined by the pace of technological change.
- grow but at a rate that will slow as time progresses and population growth increases.
- continue to grow because of the choices people make in the pursuit of profit.

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- Support for structuring taxes to encourage innovation is found in neoclassical growth theory.
False – In neoclassical growth theory, innovation and technological change are assumed random. Therefore, tax policies will not increase either. Support for this policy is found in the new growth theory.

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- New growth theory predicts that national growth rates will slowly converge over time.
False – The “convergence” prediction is usually associated with the neoclassical theory of growth and the lack of evidence to support that predication was a stimulus to the development of the new theory of growth. Technically, the classical theory also predicts convergence, to subsistence levels.

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- What is the per capita real GDP growth rate of Oz?

5% - 2% = 3%

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- How many years will it take the real GDP per capita of Oz to double, at this rate of growth?

Use the rule of 70

70 / 3 = 23.3 years

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- If real GDP in Oz is currently 20% larger than in Lilliput, how many years will it take Lilliput to catch up to Oz?

Lilliput will never catch up

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- Which country has the highest standard of living?

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- Which country has the fastest growing economy?

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- What is the growth rate in the standard of living in country #3?

1.6% - 0.14% = 1.46%

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- If these trends continue in country #1, what will the real GDP per capita be in 2003?

-0.6% - 0.49% = -1.09% It will be 1.09% LOWER

$30,200 – (0.0109)*$30200 = 0.9891*30200 = $29,871

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- Growth is measured by the percentage change in real GDP
- Technical innovation results from choices
- Human capital investment is key to increases in labor productivity

All three

New Growth Theory

New Growth Theory

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- Prosperity leads to decreases in death rates and increases in birth rates
- Prosperity leads to decreases in death rates and in birth rates
- Productivity growth is essential to increases in living standards

Classical

Neoclassical

New Growth Theory

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- The relationship between wage rates for women and birth rates is key
- Increased productivity leads to no improvement in living standards
- Investment in R & D increases economic growth

Neoclassical & New Growth Theory

Classical

New Growth Theory

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- The role of profits in the economy is an important component
- Romer one of the major proponents
- Malthus one of the major proponents

New Growth Theory

New Growth Theory

Classical

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Decision Tree

Student questions

Measuring Growth

Determinants of Economic Growth

Theories of Growth

Worksheet 07 Economic Growth

Q8

Q11

Q15