MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT

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Oct 28, 2013 (4 years and 16 days ago)

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MACROECONOMICS

UNDERSTANDING THE GLOBAL ECONOMY

Total Factor Productivity, Human Capital,
and Technology

Copyright ©
2012
John Wiley & Sons, Inc. All rights reserved.


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Key Concepts


Total Factor Productivity


Human Capital


Technological Progress


Foreign Direct Investment


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Capital

Real GDP

Effect

of shift in production function

K
0

K
1

Production Function, Old

Production Function, New

Investment, Old

Investment, New

Depreciation

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Production Function Shift


Increase in Output due to function shift


Increase in Labor


Increase in TFP


Increase in Output due to increase in capital


Economy moves to new steady state


As capital increases, output increases


Why does production function shift?

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Human Capital


Skills and knowledge that accumulate over
time, embodied in people

©
Shutterstock Images

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Human Capital

GDP per capita =

Human Capital increases Labor Productivity

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Capital

Real GDP

More human capital

K
Low

K
High

Output, Low Human Capital

Output, High Human Capital

Investment, Low

Investment, High

Depreciation

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Human Capital


Increase means more output, even at current
levels of physical capital and labor


Increase means higher steady state level of
output and capital


May explain cross
-
country growth differentials

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Education and
Economic
growth

Mexico

Turkey

Greece

N. Zealand

USA

Norway

Portugal

Denmark

Italy

UK

Australia

Canada

Ireland

Iceland

Netherlands

Finland

Spain

France

Japan

Austria

Switzerland

Sweden

Korea

0
1
2
3
4
5
420
440
460
480
500
520
540
560
Conditional Growth of GDP per Capita 1960
-
2000

Conditional Student Acheivement Test Score

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Contribution to Growth

Contribution of Education to Annual Output Growth,
1950


1990


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How to increase human capital?


Educational attainment


Expenditures on education


Allocation of resources


Level of education


Cost of education


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Schooling Differences Across
Countries

0
2
4
6
8
10
12
14
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
1950
1980
2010
Canada
France
Germany
Japan
USA
UK
Russia
India
China
Brazil
Kenya
Primary
Secondary
Tertiary
Years of Education by level

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Percentage of students completing the
final year of primary school

Source: World Bank Millennium Development Goals

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Education Spending and Attainment

Turkey

Mexico

Slovakia

Poland

Hungary

Czech

Greece

N. Zealand

Portugal

Korea

Germany

Ireland

Spain

UK

France

Australia

Finland

Netherlands

Japan

Belgium

Sweden

Italy

Denmark

Iceland

Austria

Norway

USA

Switz.

400
450
500
550
0
20000
40000
60000
80000
100000
Maths test score

Cumulative spending per student (from age 6 to 15, 2006 US Dollars)

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Determinants of Efficient
Education Expenditure.

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Review


Cross
-
country differentials in per capita
output are substantial


Role of physical capital


Role of human capital


Significant fraction of differential is
unexplained


we call this “TFP”


Other elements of TFP

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TFP important

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Institutions


Property Rights


Regulatory Institutions


Macroeconomic Stabilization


Social Insurance


Conflict Management


Political Rights

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World Bank Indicators


Voice and accountability


Political stability and lack of violence


Government effectiveness


Regulation quality


Rule of law


Corruption

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Governance and GDP

Argentina

Canada

Brazil

Bulgaria

Burundi

Australia

Chile

China

Russia

Eq. Guinea

Ethiopia

Finland

France

Germany

Ghana

Greece

India

Iran

Iraq

Italy

Japan

Luxembourg

Malawi

Malaysia

UK

Nigeria

Philippines

Spain

Turkey

Ukraine

USA

Venezuela

Zambia

Zimbabwe

100
1000
10000
100000
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-1.5
-1
-0.5
0
0.5
1
1.5
2
GDP per cpita (2000 $, log scale)

Aggregate Governance Score

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Corruption Perceptions Index

(higher score = less corrupt)

Country

Score

Country

Score

Denmark

9.3

China

3.5

N. Zealand

9.3

Thailand

3.5

Singapore

9.3

Greece

3.5

Sweden

9.2

India

3.3

Canada

8.9

Mexico

3.1

Netherlands

8.8

Argentina

2.9

Australia

8.7

Indonesia

2.8

Hong Kong

8.4

Ethiopia

2.7

Germany

7.9

Vietnam

2.7

Japan

7.8

Nigeria

2.4

UK

7.6

Ukraine

2.4

Chile

7.2

Pakistan

2.3

US

7.1

Kenya

2.1

France

6.8

Russia

2.1

Spain

6.1

Venezuela

2.0

Poland

5.3

Sudan

1.6

S. Africa

4.5

Iraq

1.5

Malaysia

4.4

Afghanistan

1.4

Italy

3.9

Myanmar

1.4

Brazil

3.7

Somalia

1.1

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Bribe Payers Index

(higher figure = less likely to bribe)

Country

Score

Country

Score

Belgium

8.8

Spain

7.9

Canada

8.8

Hong Kong

7.6

Netherlands

8.7

South Africa

7.5

Switzerland

8.7

South Korea

7.5

Germany

8.6

Taiwan

7.5

UK

8.6

Italy

7.4

Japan

8.6

Brazil

7.4

Australia

8.5

India

6.8

France

8.1

Mexico

6.6

Singapore

8.1

China

6.5

US

8.1

Russia

5.9

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Rent Seeking



Activity in which value
-
added produced by
one person is taken by another


Examples


Water subsidies


Sugar tariffs


Insider contracts or trading


Concerns


Absorbs resources (labor and capital)


Acts as a tax


Rent seeking crowds out production


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R & D


Growth can be sustained through
technological progress


Role of Research and Development in
promoting technological progress


Example of South Korea

©
Shutterstock Images

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South Korean R&D as a
%
of GDP

0
1
2
3
1967
1972
1977
1982
1986
1990
1994
1998
2002
2006
2008
% of GDP

As countries approach their steady
state, R&D
becomes more important.

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Rich countries spend more on R&D

China

Czech

France

Germany

India

Israel

Japan

S. Korea

Kuwait

Russia

Sweden

Uganda

UK

USA

100
200
400
800
1600
3200
6400
12800
25600
51200
102400
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
GDP per capita $

R&D Expenditure (% of GDP)

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Foreign Direct Investment


Investment by foreign firms in an economy


Encourages capital accumulation and
technology transfer


Can facilitate convergence among countries

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Foreign Direct Investment (FDI)

Net Foreign Direct Investment, (billions of US $)

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Summary


Effect of increases in TFP


Effect of human capital accumulation


Other influences on growth


Institutions


Technological Progress


FDI




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2012
John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in
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