Transcript I(i,K) - Rainer Maurer

Macroeconomics
© RAINER MAURER, Pforzheim
2. The Long-run Development of Economies
Prof. Dr. Rainer Maurer
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Macroeconomics
© RAINER MAURER, Pforzheim
2. The Long-run Development of Economies
2.1. The Solow-Swan Model of a Closed Economy
2.2. Several Doctrines for a Sustainable Steady State
2.2.1. Steady States and Exhaustible Resources
2.2.3. Solow's Constant Capital Rule
2.2.3. Alternative Doctrines
2.3. Understanding Structural Change
2.4. Questions for Review
Literature:
◆ Chapter 24, Mankiw, N.G.: Principles of Economics, Harcourt College Publisher
◆ Kapitel 15, Siebert, Horst; Einführung in die Volkswirtschaftslehre; Kohlhammer.
◆ Kapitel 27, Abschnitt 9, Baßler, Ulrich, et al.; Grundlagen und Probleme der
Volkswirtschaft, Schäfer-Pöschel.
Prof. Dr. Rainer Maurer
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2. The Long-run Development of Economies
© RAINER MAURER, Pforzheim
2. The Long-run Development of Economies
2.1. The Solow-Swan Model of a Closed Economy
Prof. Dr. Rainer Maurer
-3-
2400
Mrd. €
Development of German GDP in Prices of 1995
Mrd. €
2200
2000
1,1% p.a.
1800
1600
1400
1200
2,6% p.a.
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1000
800
1970
1975
Source: SVG, Jg. 2004/5
Prof. Dr. Rainer Maurer
1980
1985
1990
1995
7-Years Moving
Average
of GDPdes BIPs
Gleitender
7-jahres
Durchschnitt
2000
Actual
BIP GDP
2005
2010
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Per-Capita-GDP at PPP-Dollar of 2005
(Index 1950=100)
1800
South Corea
1600
1400
Japan
1200
1000
Spain
Ireland
Thailand
800
600
© RAINER MAURER, Pforzheim
India
400
USA
200
Uganda
Venezuela
Nicaragua
Bolivia
0
1950
1955
1960
1965
Source: Penn World Tables, NBER
Prof. Dr. Rainer Maurer
1970
1975
1980
1985
1990
1995
2000
2005
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2.1. The Solow-Swan Model of a Closed Economy
➤ The Neoclassical Growth Model of Solow-Swan:
■ Simplified Model of a Closed Economy:
◆ The assumptions are identical with the neoclassical
macro-model (s. Chapter 2.1.).
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◆ Different Point of View: While the neoclassical
Prof. Dr. Rainer Maurer
macromodel describes changes within a period
(=static model), the Solow-Swan-Model describes the
development of an economy over several periods
(=dynamic model).
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2.1. The Solow-Swan Model of a Closed Economy
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➤ Basic idea of the Solow-Swan model (1):
Prof. Dr. Rainer Maurer
■ GDP will grow, if a country is able to accumulate production
factors from one year to the other:
■ Accumulating production factors are not completely worn out
in the production of one period, e.g.:
◆ Capital Equipment (Machines, Production Facilities)
◆ Human Capital (Knowledge and Abilities of Humans)
◆ Technical Knowledge (Blueprints, Incorporated Knowledge)
◆ Public Goods (Legal security, homeland & national security,
transportation infrastructure etc.)
■ To simplify the analysis, we start with keeping all production
factors but capital equipment constant.
■ Later on, we will analyze, what happens, if one of the other
production factors changes.
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The Basic Idea of the Solow-Swan Model
.
1st Period
+
Payment for
Prod. Factors
Payment for
Consumption
of Households
Growth of Capital Stock
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Investment > Depreciation
Prof. Dr. Rainer Maurer
Savings = Investment
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The Basic Idea of the Solow-Swan Model
.
2nd Period
+
Payment for
Prod. Factors
Consumption
of Households
+
Growth of Capital Stock
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Investment > Depreciation
Prof. Dr. Rainer Maurer
Savings = Investment
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The Basic Idea of the Solow-Swan Model
.
3rd Period
+
Payment for
Prod. Factors
Consumption
of Households
+
+
Growth of Capital Stock
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Investment > Depreciation
Prof. Dr. Rainer Maurer
Savings = Investment
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The Basic Idea of the Solow-Swan Model
.
➤ Growth Performance after Three Periods:
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= Growth
Prof. Dr. Rainer Maurer
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2.1. The Solow-Swan Model of a Closed Economy
➤
How long does GDP growth go on ?
= How long does the capital stock grow ?
➤ As long as gross investment (It) is larger than capital
depreciation (λ*Kt) (= yearly wearout of capital equipment):
Kt+1 = Kt + It – λ * Kt
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>
(see Chapter 2.1., F. 38)
=> Kt+1 > Kt
➤ Since the capital market interest rate ensures the equivalence
of investment and savings, this means that a closed economy
grows as long as savings are larger than capital depreciation.
Prof. Dr. Rainer Maurer
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The Basic Idea of the Solow-Swan Model
+
.
+
+
Steady State!
Payment for
Prod. Factors
Consumption
of Households
No additional dredge!
= No further Growth of the Capital Stock
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Investment = Depreciation
Prof. Dr. Rainer Maurer
Savings = Investment
- 16 -
2.1. The Solow-Swan Model of a Closed Economy
➤ Graphical Exposition of the Solow-Swan-Model:
■ To simplify the graphical exposition, we assume that savings
are always a constant fraction “s” of household income:
Savings t  s * Income t
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
Prof. Dr. Rainer Maurer
St  s * Yt
■ Example: For a savings ratio of 10% (s = 0,1)
and an income of 100 000 € (= Y) savings equal
10 000 € (s * Y = 0.1 * 100 000 = 10 000).
■ From the empirical point of view, saving ratios of most
countries lie in the range of 5% - 15%. Germany has a
savings ratio of roughly 11%.
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2.1. The Solow-Swan Model of a Closed Economy
30
Y
Y(A,B,P,L,H,K)
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26
24
22
If this curve describes GDP
dependent on the capital stock K,
how will the savings curve look like?
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K
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2.1. The Solow-Swan Model of a Closed Economy
30
Y
Y(A,B,P,L,H,K)
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26
24
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20
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S = s * Y(A,B,P,L,H,K)
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10
8
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Prof. Dr. Rainer Maurer
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2.1. The Solow-Swan Model of a Closed Economy
➤ What do households make with their savings?
■ They offer their savings as credits to the capital market.
➤ Who demands household savings on the capital market?
■ Firms
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➤ What equilibrates household savings with firms demand
for credits?
Prof. Dr. Rainer Maurer
■ The interest rate (market mechanism)
- 22 -
The Capital Market
i
S = s*Y
Excess Supply => Interest decreases.
i1
i*
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i2
I(i,K)
Excess Demand => Interest increases.
I=S
Prof. Dr. Rainer Maurer
I, S
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The Capital Market
i
S = s*Y
The interest rate equilibrates
savings supply of households S=s*Y
with credit demand of firms I(i,K).
Therefore savings equal investment:
I(i,K) = S = s*Y.
i1
i*
i2
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I(i,K)
I=S
Prof. Dr. Rainer Maurer
I, S
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2.1. The Solow-Swan Model of a Closed Economy
➤ Consequently, the market mechanism of the capital
market “takes care” for the equivalence of investment and
savings.
➤ This simplifies the following analysis, since we can equate
savings and investment.
➤ In other words: Once we have determined savings, we
have determined investment.
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S(Y) = I(i)
Prof. Dr. Rainer Maurer
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2.1. The Solow-Swan Model of a Closed Economy
30
Y
Y(A,B,P,L,H,K)
28
26
K*λ
24
22
20
S = s*Y= I
18
16
14
12
10
K * λ = per Period
Depreciation of Capital Stock
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8
6
5
4
=> λ = 5/7 = 71% = Depreciation Ratio
2
0
0
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K
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2.1. The Solow-Swan Model of a Closed Economy
Up to where will GDP grow, if the
capital stock equals Kt?
30
Y
28
Y(A,B,P,L,H,K)
26
K*λ
24
22
20
S = s*Y= I
18
16
14
12
10
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8
6
4
2
0
0
2
4
6
8
10
Kt
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K
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2.1. The Solow-Swan Model of a Closed Economy
30
Y
Y(A,B,P,L,H,K)
28
26
24
K*λ
22
20
Yt
S = s*Y= I
18
Ct
16
14
12
10
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8
St = It
6
4
2
0
0
2
4
6
8
10
Kt
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K
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2.1. The Solow-Swan Model of a Closed Economy
Y
Y(A,B,P,L,H,K)
K*λ
Yt
S = s*Y= I
Ct
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= ΔKt+1 = Kt+1 – Kt
Prof. Dr. Rainer Maurer
Kt * λ
Kt
K
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2.1. The Solow-Swan Model of a Closed Economy
Y
Y(A,B,P,L,H,K)
K*λ
Yt
S = s*Y= I
Ct
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= ΔKt+1 = Kt+1 - Kt
Prof. Dr. Rainer Maurer
Kt * λ
Kt
ΔK
Kt+1
K
- 30 -
2.1. The Solow-Swan Model of a Closed Economy
Y
30
Y(A,B,P,L,H,K)
28
26
24
Yt+1
Yt
K*λ
22
Ct+1
20
S = s*Y= I
18
16
= ΔKt+2 = Kt+2 – Kt+1
14
12
10
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8
Kt+1 * λ
6
4
2
0
0
Prof. Dr. Rainer Maurer
2
4
6
8
10
Kt
12
14
16
18
Kt+1 ΔKt+2
20
22
24
Kt+2
26
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K
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2.1. The Solow-Swan Model of a Closed Economy
Y
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Y(A,B,P,L,H,K)
28
26
Yt+2
Yt+1
Yt
24
K*λ
Ct+2
22
20
S = s*Y= I
18
= ΔKt+3 = Kt+3 – Kt+2
16
14
12
10
Kt+2 * λ
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8
6
4
2
0
0
Prof. Dr. Rainer Maurer
2
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Kt
12
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Kt+1 Kt+2 ΔKt+3 Kt+3
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K
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2.1. The Solow-Swan Model of a Closed Economy
Y
Yt+3
Yt+2
Yt+1
Yt
30
Y(A,B,P,L,H,K)
28
26
24
K*λ
Ct+3
22
20
18
= ΔKt+4
16
S = s*Y= I
= Kt+4 – Kt+3
14
12
10
Kt+3 * λ
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8
6
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2
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0
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Kt
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Kt+1 Kt+2 Kt+3 ΔKt+4 K
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K
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2.1. The Solow-Swan Model of a Closed Economy
30
Y
Y*
Yt+4
Yt+3
Yt+2
Yt+1
Y(A,B,P,L,H,K)
28
26
24
K*λ
C*
22
20
Yt
18
s*Y(A,B,P,L,H,K)= I
16
14
K*+1 – K* = 0
12
I*t = Kt * λ
10
8
Steady
State!
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K*
Prof. Dr. Rainer Maurer
Kt+1 Kt+2 Kt+3 Kt+4
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K
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2.1. The Solow-Swan Model of a Closed Economy
➤ What happens to the capital stock of a country, if one of the
other production factors is increased (for some reason)?
Y  f K, B, L, H, P, A  
=>
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K?
Prof. Dr. Rainer Maurer
- 44 -
2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
30
Y
28
K*λ
26
24
Yt
Primary Effect
22
Y(A0,B,P,L,H,K)
20
18
Y*t
16
14
s*Y(A0,B,P,L,H,K)= I
12
10
8
© RAINER MAURER, Pforzheim
6
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0
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K*t
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2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
30
Y
28
K*λ
26
24
Yt
Y(A0,B,P,L,H,K)
22
20
s*Y(A1,B,P,L,H,K)= I
18
Y*t
16
14
s*Y(A0,B,P,L,H,K)= I
12
10
8
© RAINER MAURER, Pforzheim
6
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2
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0
2
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K*t
Prof. Dr. Rainer Maurer
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K
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2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
30
Y
28
K*λ
26
24
Yt
22
20
18
Y*t
s*Y(A1,B,P,L,H,K)
16
14
12
10
8
© RAINER MAURER, Pforzheim
6
4
2
0
0
2
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12
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K*t
Prof. Dr. Rainer Maurer
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K
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2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
30
Y
28
K*λ
26
24
Yt
22
20
18
s*Y(A1,B,P,L,H,K)
16
14
12
10
8
© RAINER MAURER, Pforzheim
6
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2
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0
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Kt
Prof. Dr. Rainer Maurer
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K
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2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
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Y
28
K*λ
26
24
Yt
22
Ct
20
18
s*Y(A1,B,P,L,H,K)
16
14
Kt+1 - Kt
12
10
8
Kt * λ
© RAINER MAURER, Pforzheim
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Kt
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2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
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Y
Y*
28
Secondary Effect
24
Yt
K*λ
26
Y(A1,B,P,L,H,K)
22
Primary Effect
20
18
s*Y(A1,B,P,L,H,K)
Y*t
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Kt
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2.1. The Solow-Swan Model of a Closed Economy
Y(A1,B,P,L,H,K)
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Y
Y*
28
K*λ
26
24
Yt
22
20
18
s*Y(A1,B,P,L,H,K)
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12
What factors
determine the long
run steady state
level of GDP?
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8
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- 52 -
Per-Capita-GDP at PPP-Dollar of 2005
(Index 1950=100)
1800
South Corea
1600
1400
Japan
1200
1000
Spain
Ireland
Thailand
800
600
© RAINER MAURER, Pforzheim
India
400
USA
200
Uganda
Venezuela
Nicaragua
Bolivia
0
1950
1955
1960
1965
Source: Penn World Tables, NBER
Prof. Dr. Rainer Maurer
1970
1975
1980
1985
1990
1995
2000
2005
- 54 -
2.1. The Solow-Swan Model of a Closed Economy
➤ An empirical test of the Solow-Swan model has to take care of
the fact that it is typically unknown, whether a country has
reached its Steady-State equilibrium or not.
➤ Therefore, the empirical hypotheses has to be modified in a
way that is also valid out of steady state.
➤ This leads to the following equation:
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ln  yi,t   b0  b1 * ln  i  ni   b2 * ln  sk,i   b3 * ln  sh,i   b4 * ln  yi,0 
Per- Depreciation Population
Investment
Investment
Per-Capita
Capita
Ratio
Ratio for Capital Ratio for Human GDP in the Base
Growth
BIP
Capital
Equipment
Period
➤ Variables to the right side of the equation are called “explanatory
variables”, because the Solow-Swan model states that they explain
the behavior of GDP.
Prof. Dr. Rainer Maurer
- 56 -
2.1. The Solow-Swan Model of a Closed Economy
➤ Given this equation, it is possible to use statistical methods (OLSRegression) to find values for the bi-coefficients that minimize the
average distance between the actual values of yi,t and the estimated
values. If it is not possible to find such bi-coefficients, the empirical
hypothesis (and its underlying theory) is “refuted by the data”.
➤ For the above equation, an OLS-Regression for 73 countries from
1960-85 yields the following result:
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ln  y t   1,6  0,9 * ln    ni   0,7 * ln  sk,i   0,2 * ln  sh,i   0,7 * ln  y 0 
➤ Standard statistical measures show that the estimated bi-value fulfill
the above equation with a reasonable likelihood. Therefore, the
hypothesis is not refuted by the data.
➤ The R²-Value shows that the equation is able to explain 89% of the
variance of per-capita GDP of the 74 countries of the underlying
sample.
Prof. Dr. Rainer Maurer
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2.1. The Solow-Swan Model of a Closed Economy
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➤ The following graphs also reveal the strong effect of
the capital stock growth on GDP growth for
Germany.
Prof. Dr. Rainer Maurer
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Capital Stock Growth Trend of Germany
(Prices = 1995)
5%
4%
3%
2%
1%
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0%
1970
Prof. Dr. Rainer Maurer
1975
1980
1985
1990
1995
2000
2005
Capital Stock Growth (7-Years Moving Average)
Source: AMECO-Database EU-Commission
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Growth Trend of Captial Stock and GDP of Germany
(Prices = 1995)
5%
4%
3%
2%
1%
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0%
1970
1975
1980
1985
1990
1995
2000
2005
Capital Stock Growth (7-Years Moving Average)
GDP-Growth (7-Years Moving Average)
Prof. Dr. Rainer Maurer
Source: AMECO-Database EU-Commission
- 61 -
2. The Long-run Development of Economies
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2. The Long-run Development of Economies
2.1. The Solow-Swan Model of a Closed Economy
2.2. Several Doctrines for a Sustainable Steady State
2.2.1. Steady States and Exhaustible Resources
Prof. Dr. Rainer Maurer
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2.2. Several Doctrines for a Sustainable Steady State
2.2.1. Steady States and Exhaustible Resources
➤ The "steady state" of an economy, as derived in the preceding section,
is a situation, where GDP neither grows nor shrinks over time.
➤ In this version of the Solow-Swan model, such a situation is possible,
because the problem of exhaustible resources is neglected.
➤ The implicit assumption was, all production factors are either
1. "renewable resources“ (they reproduce themselves in every period).
2. or they are accumulating, i.e. they are used up in every period to a
certain amount ("capital depreciation"), but this amount can be
replaced by investment.
➤ This version of the Solow-Swan model takes not care of the problem of
"exhaustible" resources, i.e. production factors that do not reproduce
themselves and/or whose erosion cannot be replaced by investment
goods. For example: fossil fuels, metals, minerals…
➤ It is clear that in the presence of a exhaustible resources, which are
necessary for GDP production, the achievement of a durable steady
state can become much more difficult.
Prof. Dr. Rainer Maurer
-\ Exercise 18
- 64 -
➤ A useful reclassification of production factors:
Y  f  K, A, H, P, L,
© RAINER MAURER, Pforzheim
Accumulating production
factors, which are produced
with production factors:
K = Physical Capital
A = Technological
Knowledge
H = Human Capital
P= Public Goods
Renewable (exhaustible) if
produced with renewable
(exhaustible) resources.
Prof. Dr. Rainer Maurer
Renewable
Resources:
Ideal type: Solar,
Wind & Geothermal
Energy
Conditional: Labor,
Forests, Water, Air,
Uptake Capacity of
Environment…
(IF NOT "OVERUSED")
B

Exhaustible
Resources:
Ideal type: Fossil
Fuels, Metals, Minerals,
Conditional: Labor,
Forests, Water, Air,
Uptake Capacity of
Environment…
(IF "OVERUSED")
- 65 -
➤ A useful reclassification of production factors:
Y  f  K, A, H, P, L,
Accumulating production
factors, which are produced
with production factors:
Payment
for Prod.
Factors
Consumption of
Households
Renewable
Resources:
B

Exhaustible
Resources:
Steady State
© RAINER MAURER, Pforzheim
Investment = Depreciation
Steady state possible, if produced
with renewable or substitutable
resources.
Prof. Dr. Rainer Maurer
Steady state possible, if
not "overused"
Steady state possible if
substitutable…
- 66 -
2.2. Several Doctrines for a Sustainable Steady State
2.2.2. Alternative Doctrines
© RAINER MAURER, Pforzheim
Solar Energy per Year=
3,85 Millionen Exajoules
Human Energy
Consumption
per Year = 497 EJ
Prof. Dr. Rainer Maurer
=>
Solar energy that arrives at the earth in
1 hour and 8 minutes equals 100% of our
yearly human energy consumption.
- 67 -
2. The Long-run Development of Economies
© RAINER MAURER, Pforzheim
2. The Long-run Development of Economies
2.1. The Solow-Swan Model of a Closed Economy
2.2. Several Doctrines for a Sustainable Steady State
2.2.1. Steady States and Exhaustible Resources
2.2.3. Solow's Constant Capital Rule
Prof. Dr. Rainer Maurer
- 68 -
2.2. Several Doctrines for a Sustainable Steady State
4.2.2. Solow's Constant Capital Rule
➤ Solow's "elasticity of substitution optimism":
„The world can, in effect, get along without natural resources,
so exhaustion is just an event, not a catastrophe.“
Solow, R. (1974): The Economics of Resources or the Resources of Economics, American Economic Review
© RAINER MAURER, Pforzheim
➤ Solow shows that, if there is "enough substitutability" between
exhaustible resources and accumulating production factors, it will
always be possible to meet the following maximin-welfare criterion:
"…the current generation is always entitled to take as much
out of the common intertemporal pool as it can, provided
only that it leaves behind the possibility that each
succeeding generation can be as well off as this one.“
Solow, R. (1986): On the Intergenerational Allocation of Natural Resources, in: Scandinavian Journal of Economics
➤ In other words, this criterion is fulfilled, if the current generation leaves
enough production factors to all future generations, that these
generations can realize per-capita consumption levels at least as high
as the current generation (maximin-criterion).
Prof. Dr. Rainer Maurer
- 69 -
2.2. Several Doctrines for a Sustainable Steady State
4.2.2. Solow's Constant Capital Rule
➤ Solow's constant capital rule, sometime also called "neoclassical
sustainability" or "very weak sustainability" (VWS) is based on two kind
of value judgments:
1. A normative value judgment (or "ethical rule"), according to which " the
current generation shall leave enough production factors to all future
generations, such that these generations can realize at least as high percapita consumption levels as the current generation (maximin-criterion)."
2. An empirical value judgment (or "technical presumption"), according to
which one of the above three sets for "enough substitutability" (sl. 68)
between accumulating and exhaustible production factors is always fulfilled.
© RAINER MAURER, Pforzheim
➤ As always such value judgments are debatable, i.e. there is no logical
necessity to accept them.
➤ In the following a couple of well-known alternative point of views are
surveyed:
Prof. Dr. Rainer Maurer
- 74 -
2. The Long-run Development of Economies
© RAINER MAURER, Pforzheim
2. The Long-run Development of Economies
2.1. The Solow-Swan Model of a Closed Economy
2.2. Several Doctrines for a Sustainable Steady State
2.2.1. Steady States and Exhaustible Resources
2.2.3. Solow's Constant Capital Rule
2.2.3. Alternative Doctrines
Prof. Dr. Rainer Maurer
- 75 -
2.2. Several Doctrines for a Sustainable Steady State
2.2.2. Alternative Doctrines
Ethical Value
Judgment
Empirical Value
Judgment
Conclusion
Open
Hedonism
„After us the
deluge!“
Not necessary
given this ethical
value judgment !
=> No need to care
Madame
about the interests
de
of future
Pompadour
generations
???
Epistemological
Scepticism
(Anthropocentric)
It would be
irresponsible to
restrict the often
still precarious
welfare situation of
current generations
based on highly
uncertain forecasts
about the welfare
of future
generations.
The history of
technological
discovery shows
that it is no
possible to forecast
the long-run future
in a half-way
reliable way.
=> People naturally
take care for their
children - whose
future is closer
and therefore
easier to forecast.
That’s sufficient!
© RAINER MAURER, Pforzheim
Name
Prof. Dr. Rainer Maurer
Supporter
Narveson
(2012)
(Philosopher,
University
of
Waterloo)
- 76 -
2.2. Several Doctrines for a Sustainable Steady State
2.2.2. Alternative Doctrines
Name
Ethical Value
Judgment
Empirical Value
Judgment
“Very
weak
sustainability”
Future generations
should be able to
consume at least
as much as the
current generation
(Maximin-Principle)
It will be possible in
the long run to
substitute all
exhaustible
resources either by
other resources or
by technological
knowledge.
Conclusion
© RAINER MAURER, Pforzheim
=> No government
intervention necessary. The market
mechanism is able
to solve the
(Anthroproblem of interpocentric)
temporal resource
allocation in an
efficient way.
=> It is necessary to
“Weak
Future generations A complete
respect minimum lisustainshould be able to
substitution of all
mits for exhaustible
ability”
consume at least
exhaustible
resources and the
as much as the
resources by other regeneration limits
(Anthrocurrent generation production factors of renewable resources - as far as
pocentric) (Maximin-Principle) is most likely not
necessary for a surpossible,
vival of the human
population (= anthropocentric view).
Prof. Dr. Rainer Maurer
Supporter
Solow
(1974a)
(1974b)
(1986)
London
School:
Barbier/
Markandya
(1989)
(1990),
Pearce/
Turner
(1990) - 77 -
2.2. Several Doctrines for a Sustainable Steady State
2.2.2. Alternative Doctrines
Name
Ethical Value
Judgment
Empirical Value
Judgment
Conclusion
Keeping the stock
of natural capital
(natural resources
+ ecological syst(Nonems) quantitatively
Anthro(not on a market
pocentric) value basis…) constant, no matter
how high the opportunity costs in
terms of forgone
consumption are
Whether
exhaustible
resources are
substitutable or not
is of no importance, since human consumption
has to adjust to the
premise of keeping
constant the stock
of natural capital.
=>Economic
growth is only
allowed for, if there
is enough
technological progress that permits
an increase of
GDP without
reducing the stock
of natural capital.
Herman
Daly
(1991 a)
(1991 b)
Keeping the stock of
natural capital quantitatively constant,
no matter the opportunity costs of forgone consumption.
No economic growth is allowed for,
since all economic
growth produces
unwanted byproducts.
=>Economic or
Population growth
has to be stopped.
Only “non-material”
growth is allowed
for.
Deep
Ecology
Movement:
Strong
Sustainability
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Critical
Sustainability
(NonAnthropocentric)
Prof. Dr. Rainer Maurer
Supporter
Næss(1972),
Drengson/
Inoue (1995)
- 78 -
2. The Long-run Development of Economies
© RAINER MAURER, Pforzheim
2. The Long-run Development of Economies
2.1. The Solow-Swan Model of a Closed Economy
2.2. Several Doctrines for a Sustainable Steady State
4.2.1. Solow's Constant Capital Rule
2.2.2. Alternative Doctrines
2.3. Understanding Structural Change
Prof. Dr. Rainer Maurer
- 80 -
Structure of German GDP by Production
(in Percent of Total GDP; Current Prices)
Government Services
100%
90%
80%
Other Private Service Industries1)
48 %
Banking, Insurance, Real Estate &
Business Services 71 %
70%
60%
50%
40%
30%
Wholesale and Retail Trade &
Hotel and Catering Industries
48 %
Industry
© RAINER MAURER, Pforzheim
20%
28 %
10%
0%
1970
Agriculture and Forestry
1975
Source: SVG, Jg. 2004/5
Prof. Dr. Rainer Maurer
1980
1985
1990
1995
2000
- 81 -
Structure of German Employees
100%
Share of Employees per Sector in % of all Employees
.
Government
Services
90%
80%
46 %
Other Private Service Industries1)
Banking,Insurance
70%
Real Estate, Business Services
71 %
Wholesale and Retail Trade &
60%
50%
Hotel and Catering Industries
40%
45 %
30%
Industry
© RAINER MAURER, Pforzheim
20%
27 %
10%
Agriculture and Forestry
0%
1970
1975
Source: SVG, Jg. 2004/5
Prof. Dr. Rainer Maurer
1980
1985
1990
1995
2000
- 82 -
Long-run Development of the Structure of German GDP by Production
(in Percent of Total GDP; Current Prices)
80%
73%
70%
69%
61%
60%
57%
53%
50%
49%
47%
40%
37%
33%
30%
31%
28%
49%
43%
41%
40%
53%
33%
31%
48%
48%
41%
41%
38%
36%
33%
32%
30%
27%
25%
21%
20%
16%
15%
© RAINER MAURER, Pforzheim
10%
10%
6%
3%
2%
0%
1850
1870
1890
Landwirtschaft
Agriculture
1910
1925
1938
1950
1960
1970
Industrie
Industry
Source:Geißler,
Quelle:
Geißler,Rainer
Rainer(2006):
(2006):Die
DieSozialstruktur
SozialstrukturDeutschlands,
Deutschlands,Statistisches
StatistischesBundesamt,
Bundesamt,
Calculations by Caroline Hauber & Ann-Cathrin Lietzau in their term paper "Wie viel Industrie braucht ein Land?"
Prof. Dr. Rainer Maurer
1980
1%
1990
1%
2000
1%
2009
Dienstleistungen
Services
- 83 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤
➤
➤
1.
In the long run the demand for services grows stronger than the
demand for industrial goods.
2.
For many industrial goods prices fall faster as production
quantities grow.
Each of both explanations is already sufficient to cause an increase
of the service sector share in GDP.
If both act together, this will increase the speed of structural change.
© RAINER MAURER, Pforzheim
➤
Why does in the long-run value added grow stronger in the service
sector than in the industrial sector?
Two major explanations:
Prof. Dr. Rainer Maurer
- 85 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤
Explanations for the income dependency of the demand for
goods:
1. When incomes grow, households increase first their
© RAINER MAURER, Pforzheim
endowment with necessary durable consumer goods (housing,
furniture, household appliances, cars…). Only after this
endowment with necessities is completed, households demand
services (traveling, restaurants, cinema, theater, sport…),
which are typically not as necessary as durable consumer
goods.
Prof. Dr. Rainer Maurer
2. When incomes grow, most households prefer to have more
leisure time (long-run trend of reduction of working hours).
More leisure time activities cause a higher demand for services
(entertainment, sporting facilities, cultural events, tourism etc.).
- 86 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤
Explanations for the income dependency of the demand for
goods:
3. When incomes grow, net wealth does also grow („heir
generation“). Higher net wealth causes a higher
demand for financial consultancy (bank services, wealth
management, information services).
4. When incomes grow, live expectancy does also grow.
© RAINER MAURER, Pforzheim
Higher live expectancy, causes a higher demand for
health services.
Prof. Dr. Rainer Maurer
- 87 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤
Simplification: “Two-sector-economy”
© RAINER MAURER, Pforzheim
yS =
pS =
yI =
pI =
Prof. Dr. Rainer Maurer
quantities service goods
price service goods
quantities industrial goods
price industrial goods
=>
GDP = yS * pS + yI * pI
| neglect of
intermediate goods
=>
GDP = value added service sector
+ value added industrial sector
- 88 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
10
PS
9
S(PS)
8
yS
7
6
PS,t+15
PS,t 4
3
D(PS)t+1
2
© RAINER MAURER, Pforzheim
1
y S * pS
* p S  y I * pI
If demand for services grows
faster as demand for industrial
goods, the share of services
(yS * pS) in GDP (yS * pS + yI * pI)
grows.
D(PS)t
0
0
Prof. Dr. Rainer Maurer
1
2
3
4
5
6
YS,t YS,t+1
7
8
9
10
YS
- 89 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤ The income elasticity of the demand for services:
  XS * PS   XS * PS  prozentualer Anstieg der Dl.nachfrage
  X,Y  

  Y * PY   Y * PY 
prozentualer Einkommensanstieg
© RAINER MAURER, Pforzheim
➤ If the elasticity is larger than 1, demand for services grows more
that 1% if income grows 1%.
 A larger fraction of income is spent for services.
 A smaller fraction of income is spent for other goods.
Prof. Dr. Rainer Maurer
- 90 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
The empirical income elasticity of the demand for services
BlundeIl (1988)
United Kingdom
1,2 - 1,7
Hammes et al. (1989)
USA,
France, Canada
1,1 - 1,4
G. Hansen (1993)
West Germany
1,3 - 2,0
60 Countries
1,0 - 1,6
West Germany
1,5 - 4,0
Falvey / Gemmell (1996)
© RAINER MAURER, Pforzheim
H.-J. Hansen (1996)
Prof. Dr. Rainer Maurer
- 91 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
2. Explanation for structural change:
■ A productivity bias causes the prices for industrial goods to
decrease stronger as the production quantities grow:
◆ In many industries the technological possibilities for
productivity growth are larger than in the service sector. For
example, in many industries production is more and more
carried out by automates and robots, while in most service
sectors (hair dresser, restaurants, music bands, tourism etc.)
this is not possible.
© RAINER MAURER, Pforzheim
◆ Under competition, technological progress causes a decrease
Prof. Dr. Rainer Maurer
of prices stronger than the increase of production quantities in
many industry sectors. Taken for itself, this causes a long-run
increase in the share of the service sector in total GDP:
- 92 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
10
PI
9
yS
8
y S * pS
* pS  yI * pI
7
S(PI)t
6
S(PI) t+1
PI,t+15
PI,t
4
3
-
2
+
© RAINER MAURER, Pforzheim
1
D(PI)
0
0
Prof. Dr. Rainer Maurer
1
2
3
4
5
YI,t YI,t+1
6
7
8
9
10
YI
If supply of industrial goods grows
such that prices fall faster than
quantities grow, the share of
services (yS * pS) in GDP
(yS * pS + yI * pI) grows.
However: Increase of supply
leads only to decrease of sales,
if demand reacts inelastic
|ε(x,p)|<1, i.e. if prices fall faster
than quantities!
- 93 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
10
PI
S(PS)t
S(PS) t+1
However: Increase of supply
leads only to decrease of sales,
if demand reacts inelastic
|ε(x,p)|<1, i.e. if prices fall faster
than quantities!
9
8
7
-
6
PI,t+15
PI,t
In this example, demand is
elastic |ε(x,p)|>1
so that sales grow.
|ε(x,p)|=1
4
+
3
|ε(x,p)|<1
2
© RAINER MAURER, Pforzheim
1
D(PI)
0
0
1
2
3
YI,t YI,t+1
Prof. Dr. Rainer Maurer
4
5
6
7
8
9
10
YS
However: If supply grows in the
long run such that the price falls
below the point, where demand
becomes inelastic, industrial
sales fall!
- 94 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤ However, also other factors may also attribute to the increase of
the service sector share in total GDP, as the following
newspaper articles shows:
„Levis wandert aus“
➤ What relation exists between the location decision of Levis and
the structural change in the US?
© RAINER MAURER, Pforzheim
➤ Do similar examples exist for Germany?
Prof. Dr. Rainer Maurer
- 96 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
© RAINER MAURER, Pforzheim
■ Hence, the old industrial countries lose industrial production and
specialize more and more into service sector production, where they
still hold cost advantages compared to emerging countries (R&D,
management and head quarter functions stay in the old industrial
countries, while industrial production migrates to the emerging
countries.).
■ As a consequence, production quantities in industrial production
decreases, while production quantities in the service sector grow:
Prof. Dr. Rainer Maurer
Effect on service sector
share in GDP:
yS
y S * pS
* pS  yI * pI
- 98 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤ Intensified division of labor (Outsourcing):
© RAINER MAURER, Pforzheim
■ The progress in information and telecommunication industries allows
more outsourcing of service sector activities from industrial firms into
autonomous service sector firms (building services, security
services, factory canteen, legal department, marketing etc.).
Prof. Dr. Rainer Maurer
■ Example:
◆ A car producer owns a canteen for its staff. => The value added
of the canteen is part of the value added of the car producer and
hence (by statistical convention) part of industrial production.
◆ The car producer outsources the canteen. => The canteen is now
an autonomous enterprise and its production is (by statistical
convention) accounted for service sector production.
- 99 -
2. The Long-run Development of Economies
2.3. Understanding Structural Change
➤ Intensified division of labor (Outsourcing):
■ Value added in industrial production decreases therefore,
while value added in service sector industries grows
(advertising, R&D, consulting, legal services, cleaning
services, security services).
Effect on service sector
share in GDP:
© RAINER MAURER, Pforzheim
(Same as with
globalization…)
yS
y S * pS
* pS  yI * pI
Prof. Dr. Rainer Maurer
- 100 -
2.4. Questions for Review
You should be able to answer the following questions at the
end of this chapter. All of the questions can be answered
with the help of the lecture notes. If you have difficulties in
answering a question, discuss this question with me at the
end of the lecture, attend my colloquium or send me an EMail.
© RAINER MAURER, Pforzheim
➤
Prof. Dr. Rainer Maurer
- 101 -
© RAINER MAURER, Pforzheim
2.4. Questions for Review
1.
What empirical phenomena does the theory of economic growth
explain?
2.
What empirical phenomena does the theory of the business cycle
explain?
3.
What factors of production play an important role in the growth
model of Solow-Swan and what is the difference between them?
4.
What is the savings ratio and how does this ratio affect the growth
mechanism in the Solow-Swan model?
5.
What is the depreciation ratio and how does this ratio affect the
growth mechanism in the Solow-Swan model?
6.
Under what condition does the capital stock grow in the SolowSwan model of a closed economy?
7.
Under what condition does the capital stock shrink in the SolowSwan model of a closed economy?
Prof. Dr. Rainer Maurer
- 102 -
2.4. Questions for Review
8.
When does capital stock growth stop in the Solow-Swan model of a
closed economy?
9.
What parameters determine the level of the steady state capital stock
in the Solow-Swan model of a closed economy?
10. What relationship exists in the Solow-Swan model between capital
stock and GDP?
© RAINER MAURER, Pforzheim
11. Start with a steady state situation in the Solow-Swan model of a
closed economy and describe the effect of a one time increase in the
stock of human capital.
13. What is the effect of continuous growth of technological knowledge
(A) on the level of the capital stock in the Solow-Swan model of a
closed economy?
14. What is the effect of continuous growth of technological knowledge
(A) on the level of the GDP in the Solow-Swan model of a closed
economy?
- 103 -
Prof. Dr. Rainer Maurer
2.4. Questions for Review
15. Analyze the effect of a one time raise of the stock of technological
knowledge from A1 to A2 on the steady state equilibrium in the
following diagram.
Y
K*λ
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Y(A1,B,P,L,H1,K)
s*Y(A1,B,P,L,H1,K)
K
Prof. Dr. Rainer Maurer
- 104 -
2.4. Questions for Review
16. Analyze the effect of a one time decrease in the depreciation ratio
λ1 on the steady state equilibrium in the following diagram.
Y
K*λ1
Y(A,B,P,L,H,K)
© RAINER MAURER, Pforzheim
s*Y(A,B,P,L,H,K)
K
Prof. Dr. Rainer Maurer
- 105 -
2.4. Questions for Review
17. Analyze the effect of a one time increase in the savings ratio s1 on
the steady state equilibrium in the following diagram.
Y
K*λ
Y(A,B,P,L,H,K)
© RAINER MAURER, Pforzheim
s1*Y(A,B,P,L,H,K)
K
Prof. Dr. Rainer Maurer
- 106 -
2.4. Questions for Review
18. Analyze the effect of a decrease in the availability of an exhaustible
resource on the steady state of this economy.
K*λ1
Y(A,B,P,L,H,K)
Y
© RAINER MAURER, Pforzheim
s*Y(A,B,P,L,H,K)
K
Prof. Dr. Rainer Maurer
- 107 -
2.4. Questions for Review
19. If you were in the position of a politician, who wants to improve the
growth performance of his country, what kind of measures would
you choose?
20. Explain the basic pattern of structural change observable?
21. Explain the consequences of income growth on structural change.
22. What is the impact of the "productivity bias" on structural change?
23. What are the effects of "globalization" on structural change?
© RAINER MAURER, Pforzheim
24. How does the "outsourcing" trend in private companies effect
structural change?
Prof. Dr. Rainer Maurer
- 108 -