Transcript Economics 154b Spring 2006 National Income Accounting and

Economics 122a
Fall 2009
Agenda for this week:
1. The Classical macro model
2. Measuring output
1
Some announcements
• First problem set will be posted the week of Sept 21 and due the
next week.
• Course is limited to those on course list on web page.
• I will post readings on logarithms on the course web page. There
will probably be an optional section on logs and math review in the
next couple of weeks.
• We may have occasional optional extra sessions on Fridays, 11:3512:50 for technical review.
• Sections will begin next week. You should sign up on the Registrar’s
section list.
Wednesday 4:50-4:50 and 5:00-5:50
Wednesday 7:00-7:50 and 8:00-8:50
Thursday 4:50-4:50 and 5:00-5:50
2
Repeat: The two themes of macro
There are two major recurrent themes running through
macro:
i) Business cycles
ii) Economic growth
Virtually every macroeconomic issue revolves around
these issues, or a confusion concerning them.
3
The Other Central Concern of Macroeconomics:
Economic growth
Economic growth concerns the trend in output over the long run.
Questions:
1. What determines “potential output” (Mankiw: “natural
output”)?
2. What determines to growth of output over time?
3. What determines the differences in productivity among nations?
In macroeconomics, we use the neoclassical growth model to understand
economic growth.
GDP (2007 international prices, billions of $)
GDP trends in 3 big regions
10,000
1,000
China
US
SubSaharanAfrica
100
1960
5
1970
1980
1990
2000
2007
GDP per capita (2007 international US dollars)
Per capita growth trends in 3 big regions
20,000
China
US
SubSaharanAfrica
2,000
200
1980
6
1985
1990
1995
2000
2007
Basics of Static Classical Model:
Production Theory
Classical production model. The basic model is simplest
representation of the classical approach. When dynamized, it
becomes the neoclassical growth model.
Factor markets: capital and labor inputs (K and L)
One sector for output (Y).
Aggregate production function (for real GDP, Y)
What is a production function? Recipe for combining inputs into
outputs for given technology.
(1) Y = F( K, L)
Standard assumptions: positive marginal product (PMP), diminishing
returns (DR), constant returns to scale (CRTS):
CRTS: mY = F( mK, mL)
PMP: ∂Y/∂K>0; ∂Y/∂L>0
7
DR: ∂2Y/∂K2<0; ∂2Y/∂L2<0
Production function for omelette
Courtesy of Elizabeth David, An Omelette and a Glass of Wine
8
Basics of Static Classical Model:
Production Theory
Classical production model. The basic model is simplest
representation of the classical approach. When dynamized, it
becomes the neoclassical growth model.
Factor markets: capital and labor inputs (K and L)
One sector for output (Y).
Aggregate production function (for real GDP, Y)
(1) Y = F( K, L)
Standard assumptions: positive marginal product (PMP), diminishing
returns (DR), constant returns to scale (CRTS):
CRTS: mY = F( mK, mL)
PMP: ∂Y/∂K>0; ∂Y/∂L>0
DR: ∂2Y/∂K2<0; ∂2Y/∂L2<0
9
Potential Output
Potential output. With exogenous labor force (LF), inherited
capital (K) , unemployment at the NAIRU (u*), this gives
potential output (Yp):
(2) Yp = F[K, (1-u*)LF]
Potential output critical for unemployment theory and growth
theory and for medium and long-run forecasts.
NAIRU (Mankiw “natural rate of unemployment”)
= non-accelerating inflation rate of unemployment
= unemployment rate at which inflation neither rises or falls
= lowest sustainable rate of unemployment.
10
Actual and Potential GDP
14,000
13,500
13,000
12,500
12,000
11,500
11,000
01
02
03
04
05
06
07
Actual Real GDP
Potential Real GDP
11
08
09
10
Output gap (potential minus actual GDP)
Gap (at annual rate)
[Billions of 2005 dollars]
1,000
800
600
400
200
0
-200
12
01
02
03
04
05
06
07
08
09
10
Example: Cobb-Douglas production function
Very important production function: Cobb-Douglas (log linear)
F( K, L) = AKαL1-α
Properties:
MPL = ∂[AKαL1-α]/∂L=(1-α)AKαL1-α /L = (1-α)Y/L = (1-α) x APL
(and similarly for MPK)
L
MPL
(discrete)
Y
0.00
0.00
MPL
(continuous/
derivative)
na
1.00
1.00
1.00
0.50
0.41
2.00
1.41
0.35
0.32
3.00
1.73
0.29
0.27
4.00
13
2.00
0.25
Y, MPL
F( K, L) = 1.5L1-.5
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Y
MPL
0
0.5
1
Labor inputs (L)
1.5
Factor Markets
Factor markets: capital and labor inputs (K and L):
- Capital inherited from past investments
- Labor inputs exogenous (from biology, health, customs, pharma)
Real wage rate: = W/P = MPL = ∂Y/∂L = ∂[F( K, L)]/∂L (see Fig. 1)
Real rental rate on capital (like apartment rental as $ per month):
= R/P = MPK = ∂Y/∂K = ∂[F( K, L)]/∂K
National income = labor income + capital income = WL + RK
Exhaustion of product theorem: With CRTS and competitive pricing,
paying factors their marginal product leads income = output.
14
Example: Cobb-Douglas production function
National income
Y = MPL x L + MPK x K = L[(1-α)Y/L] +K[αY/K ] = Y
(exhaustion of product theorem)
Shares of capital and labor:
share of K = RK/Y = (αY/K ) x (K/Y) = constant = α
Why do economists like Cobb-Douglas? See next slide.
15
Near-constancy of labor’s share of national income
Compensation of labor/national income
.80
.75
.70
.65
.60
.55
.50
16
50
55
60
65
70
75
80
85
90
95
00
05
What are the
macroeconomic
effects of
immigration?
Alfred Stieglitz
17
W/P
Real wages and MPL:
graphics
(W/P)*
MPL
L*
18
L
W/P
L*
Output = sum of the
slices of MPL from 0 to L*
MPL
L
19
L*
Calculus of marginal and total product
Total product = sum of marginal products up to input level.
Y(L*)  F(K , L*) 
20
L*
L*
0
0
 MPL(L)dL   [F(K , L) / L]dL
Neoclassical distribution of
output/income
W/P
*More generally,
all non-labor
income
Capital
income*
Can reverse axes
and get analogous
results for capital.
(W/P)*
Total wages
MPL
L*
21
L
W/P
(W/P)1
Effect of immigration
E1
E2
(W/P)2
Assume immigrants are
perfect substitutes for L
Results:
1. Wage rate falls.
2. Output and national
income rise.
3. Capital income rises.
4. More generally, income of
substitutes fall and
complements rise.
5. Empirical studies suggest
that low-skilled and
Hispanic workers are hurt
by Mexican immigration.
MPL
L*
22
L
National Academy of Sciences study
(The New Americans)
“Immigration over the 1980s increased the labor supply of all workers
by about 4 percent. On the basis of evidence from the literature on
labor demand, this increase could have reduced the wages of all
competing native-born workers by about 1 or 2 percent. Meanwhile,
noncompeting native-born workers would have seen their wages
increase…”
“Based on previous estimates of responses of wages to changes in
supply, the supply increase due to immigration lowered the wages
of high school dropouts by about 5 percent…”
23
Other applications of static neoclassical model
Impact of foreign investment :
• Assume that foreign firms build a factory in US. What is effect in
simple neoclassical model?
• Answer: Same as immigration, but reverse the factors.
Impact of outsourcing:
• What is effect of hiring foreign workers for call centers,
radiology, computer programming?
• Very similar to immigration: like having workers here.
Impact of government debt:
• What is the effect of a growing government debt?
• Slightly more complicated, but might crowd out capital stock.
This then reduces output. Note effects on wages and rentals.
24
Let’s go back and ask:
“Just what is this ‘Y’?”
“Just how do we measure GDP and real GDP?”
25
26
Survey of Current Business, August 2009
27
Inflation as measured by the price of
gross domestic purchases*
Note: This is a new concept not in the textbooks. It reflects the prices of
domestic purchases rather than domestic product.
28
Major concepts in national economic accounts
1. GDP measures final output of goods and services.
2. Two ways of measuring GDP lead to identical results:
• Production = income
3. Savings = investment is an accounting identity.
• We will also see that it is an equilibrium condition.
• Note the advanced version of this includes government and
foreign sector.
4. GDP v. GNP: differs by ownership of factors
5. Constant v. current prices: correct for changing prices
6. Value added: Total sales less purchases of intermediate goods
- Note that income-side GDP adds up value addeds
7. Net exports = exports – imports
8. Net v. gross investment:
• Net investment = gross investment minus deprecation
29
How to measure output growth?
Now take the following numerical example.
• Suppose good 1 is computers and good 2 is shoes.
• How would we measure total output and prices?
period 1
Real output
q1
q2
Prices
p1
p2
30
Ratio:
period 2 to
period 2 period 1
1
1
100
1
100
1
1
1
0.010
1.00
0.010
1.00