Lecture No. 1: Introduction to Macro-Economics

1. Lecture No. 1: Introduction to Macro-Economics

3. Basic questions in Macroeconomics • What creates growth in GDP per capita in the long run?’ and ‘what creates fluctuations in the short run?’ • ‘What explains the level of long-run unemployment?’ and ‘what explains the short-run variations in unemployment?’

4. Causes of fluctuations: Short Run • Exogenous shocks • Short-run nominal rigidity • Expectational errors • Factors of Growth: Long Run • Long run propensity to save and invest • Research and development

5. Macroeconomics for the long run: • Assumptions • Exogenous shocks do not occur • Prices are fully adjusted • Expectations are correct

6. Lecture No. 2: • Some Facts about Prosperity and Growth

7. “Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the ‘nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else” • (Lucas, mid-1980s)

8. Growth Rates (Real GDP per Person )

9. Absolute Convergence (fig. 2.3 page 42) • In the long run GDP per worker (or per capita) converges to one and the same growth path in all countries, so that all countries converge on the same level of income per worker.

10. Conditional convergence (fig.2.7 page 48) • A country’s income per worker (or per capita) converges to a country-specific long-run growth path which is given by the basic structural characteristics of the country. The further below its own long-run growth path a country starts, the faster it will grow. Income per worker therefore converges to the same level across countries conditional on the countries being structurally alike.

11. Club convergence (fig.2.7 page 48) • A country’s income per worker (or per capita) converges to a long-run growth path that depends on the country’s basic structural characteristics and on whether its initial GDP per capita is above or below a specific threshold value. The further below the relevant growth path a country starts out, the faster it will grow. Income per worker therefore converges to the same level across countries conditional on the countries being structurally alike and on the countries starting on the same side of their respective threshold values.

12. Balance growth (page 54) • The growth process follows a balanced growth path if GDP per worker, consumption per worker, the real wage rate, and the capital intensity all grow at one and the same constant rate, g, the labor force (population) grows at constant rate, n, GDP consumption, and capital grow at the common rate, g+n, the capital-output ratio is constant, and the rate of return on capital is constant.

13. Lecture No. 3: Capital Accumulation and Growth: The Basic Solow Model

14. Basic Question from previous lecture • How can a nation escape from poverty and ultimately become rich? • How can a country initiate a growth process that will lead it to a higher level of GDP and consumption per person?

15. Assumptions of Solow Growth Model • Out put in each period is determined by the available supplies of capital and labor due to competitive clearing of factor markets. • Total saving and investment is assumed to be an exogenous fraction of total income. • Labor force is assumed to grow at a given rate. • Agents (consumers, producers, and may be government) • Commodities (output, capital services and labor services) • All three markets are perfectly competitive • Therefore, available resources are fully utilized.

16. Features of Solow Growth Model • It incorporate the dynamic link between the flows of saving and investment and the stock of capital • Stock of capital increases by and amount equal to gross investment minus depreciation on the initial capital stock. • Suggested long run substitution between labor and capital • Evolution of capital through capital accumulation • Evolution of labor force though population growth • Evolution of total production or income through evolutions of total inputs of labor and capital • Answer the fundamental question “what determines the wealth of nation?”

17. Production Sector • Constant return to scale or homogeneous of degree one • Capital labor ratios are not constant • Constant income shares and independent of capital labor ratio Household Sector • Long run labor supply is inelastic • Inelastic supply of capital services which is equal to the size of the capital stock • Household sector behaves as one representative consumer who earns all the country’s income • Household sector saves the exogenous fraction, s, of total income in each period • Biological behavior or the households

18. Basic Solow Growth Model • Fig no. 3.1 page no. 65 • Equations Nos. 14,15,16,17,18,19 Analysis: Basic Solow Growth Model • Divide equation no. 14 by ‘L’ • And get eq 27 • Fig 3.4 • Eq 28 The Law of Motion • Analyze the Solow model in terms of variables we are interested in; • Insert eq 17 into 18 • Get eq 29 Convergence to the Steady State • Differentiate eq. 29 • Fig. 3.5