These are very detailed lecture notes for EC201 macroeconomics from the University of Warwick's economics course. They were made by a student who scored a first in 2nd year exams.
- GDP: main measure of aggregate economic activity. The market value of final goods and services
produced in an economy each year.
Measuring the Economic
- PPP-Adjusted Real GDP per capita
o When computing changes over time, we fix prices at a given baseline year (‘real’)
o When comparing different countries, we fix a set of international prices (‘PPP’). This is
useful since prices are generally higher in rich countries.
Growth Over the Very Long Run
- Key messages:
o Sustained increases in SoL are a recent phenomenon.
o Economic growth emerges in different places at different times.
- Modern Economic Growth:
o From 1870 to 2008: US real GDP/capita increases by 15x
o Other observations but no real important theory.
Importance?
- GDP facilitates cross-country comparisons
- It’s also a measure of productive capacity -> which is a crucial factor for improvements in
development (I.e., health and other welfare-related dimensions)
- The correlation between GDP/capita and HDI is strong and positive
Model of Production. (Video 2)
Rationale: Explain the differences in economic performance between countries
Environment of the Economy
- Parameters:
o Single, closed economy
o 1 consumption good
o Households are exogenous
o Two inputs: Labour (L), and Capital (K)
o Production function: how much output (Y) can be produced given any number of inputs
- Cobb-Douglas Production Function
α 1−α
Y=A K L
- ( Y ) is the output, ( ( K ) ∧( L ) )are the production inputs, α parameter controlling the importance of
capital (vs labor) in production, A is the total factor productivity (tech) (TFP)
- 3 ways to achieve economic growth (increase in Y)
o Capital accumulation
, o Labor force increases
o Technological changes
- Note:
o The function is strictly increasing in both inputs (MPK and MPL > 0)
o There is decreasing marginal products (2nd derivatives of K and L)
o There are constant returns to scale
- Under CRS, dividing the output by the number of workers, we obtain:
Y
L
=F
K
L( )
,1
- We can write output per worker as:
y=f ( k )
Y K
- Where y= ∧k =
L L
- Lowercase letters denote per worker quantities
Continued:
- We want to maximize profits
- π=tot . rev .−tot . c ⇒ π= pY −rK −wL
- Max. Profit.:
max ❑ F ( K , L )−rK −wL
K ,L
- Maximize profit by choosing capital and labor levels. We look for the FOC of the profit function
s.t K & L. Essentially calculate MPK=MCK and MPL=MCL
- The FOC reveals that the marginal products are equal to the marginal cost.
Households
- Supply K and L and demand Y
- If we assume that the supply of K and L is exogenously given this implies the supply curve of
each is perfectly inelastic (vertical)
- Also, if households demand the entire production, all quantities will be bought up.
General Equilibrium
- Eq.: value of all endogenous quantities and prices s.t all markets clear
- Market for K, L and the output produced Y.
, -
- To solve for the model, we will resolve a system of 5 equations:
¿
1. K =K
¿
2. L =L
3. Y ¿ = A K ¿α L¿1−α
¿
4. r =α A ¿ ¿
¿
5. w = ( 1−α ) A ¿ ¿
Observations
- Firms employ all the supplied capital and labor
- The eq. Wage is proportional to output per worker
- The eq. Rental rate is proportional to capital ratio
- Firms make 0 profits <- Perfect competition
Development Accounting (Video 3)
Applications of the Model
- Idea: use the production function to account for cross-country differences in GDP per capita.
- We have y ¿ = A k α
- Research Sub-Q:
o How are cross-country differences in y ¿due to cross-country differences in k
o Can the model explain the data if we set A (Level of prod.) for all countries
Implementation:
- National Accounts and other sources provide k estimates for many countries.
- To calibrate α , we use the fact that C-D functions and competitive markets imply:
r ¿ K ¿ α ∧w ¿ L¿
= =1−α
Y¿ Y¿
- Where α is the capital share of income, and 1−α is the labor share of income
- This is an example of calibration: setting model parameters to match empirical facts
Applications and Key Results
, - If the TFP is normalized to 1 for all countries, the model under-predicts cross-country gaps in
GDP/capita
- Observed cross-country gaps in k are not large enough to explain observed cross-country gaps in
y
o TFP should be wildly different across countries
o We can compute the country specific TFP to match differences in GDP
What is TFP?
- In the model (TFP) is represented by the parameter A
o Also called the technology parameter
- Empirically, it is the portion of output not explained by the number of inputs used in production
- TFP -> measures residual growth in total output of a firm, industry or national economy, not
explained by the accumulation of traditional inputs (K & L)
Understanding TFP differences
- Output differences between the richest and poorest countries
o Differences in capital per person explain 1 third of the difference
o TFP differences explain the remaining difference
- Possible explanations: tech; human capital; institutions; cultures; capital misallocation
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller joebloggs123. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $13.61. You're not tied to anything after your purchase.
