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EW LECTURE 1EW LECTURE 1
MACRO 510*MACRO 510*
Professor Abdul BayesProfessor Abdul Bayes((abdulbayes@yahoo!o"abdulbayes@yahoo!o"##
01$115%&5&$01$115%&5&$
*Ada'ed fro" )arous sour!es*Ada'ed fro" )arous sour!es
mailto:[email protected]:[email protected]:[email protected]
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THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
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Wha +s E!o,o"!s-
Economics sudes he !ho!esha !a, be "ade .he, here s
s!ar!y
Scarcity s a suao, , .h!hresour!es are l"ed , /ua,y
a,d !a, be used , dffere,
.ays
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Wha +s E!o,o"!s-
Be!ause our resour!es are
l"ed .e "us sa!rf!e o,e
h, for a,oher
E!o,o"ss are al.ays
re",d, us ha here s
s!ar!y2ha here are radeoffs
, e)eryh, .e do
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Pos)e )ersus 3or"a)e
A,alyss
4 Positive economics 'red!s he
!o,se/ue,!es of aler,a)ea!o,s a,s.er, he /ueso,s
Wha s-6 or Wha .ll be-6
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Pos)e )ersus 3or"a)e
A,alyss
4 Normative economics a,s.ers he /ueso, Wha
ouh o be- 3or"a)e/ueso,s le a he hear of
'ol!y debaes
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7e!so,s , a Moder,
E!o,o"y4 E!o,o"! de!so,s are "ade a e)ery le)el ,
so!ey
4 The !ho!es "ade by ,d)duals fr"s a,d
o)er,"e,s a,s.er hree /ueso,s8
1 Wha 'rodu!s do .e 'rodu!e-
9 :o. do .e 'rodu!e he 'rodu!s-
; Who !o,su"es he 'rodu!s-
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E!o,o"! A,alyss
a,d Moder, Proble"s
E!o,o"! a,alyss 'ro)des
"'ora, ,shs ,o real
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TE3 PR+3C+PLE= O> ECO3OM+C=
HOW PEOPLE MAKE DECISIONS
1 Peo'le fa!e rade
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$o)er,"e, !a, so"e"es "'ro)e "are ou!o"es ?far"ers,eed safe
!ro's resaura,s ,eed 'ay"e, by !uso"ers
HOW THE ECONOMY AS A WHOLE WORKS
DCou,rys sa,dard of l), de'e,ds o, ably o 'rodu!e a,d'ro!ess oods
a,d ser)!es ? )arao,s due o 'rodu!)y
F Pr!es rse .he, o)er,"e, 'r,s oo "u!h "o,ey
10 =o!ey fa!es a shor
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MICRO AND MACROMICRO AND MACROECONOMICSECONOMICS
• Macroeconomics is the branch of economics that deals with anation’s economy as a whole
• Microeconomics deals with firm, hosehold and indi!idal
• Macroeconomics focses on the economic isses"nem#loyment,inflation, $rowth, trade, and the $ross domestic #rodct"that aremost often discssed in the media and in #olitical debates%
• As a biolo$y teacher teaches anatomy with #lastic re#licas of hmanbody, economists se models &styli'ed facts not details & sim#le
economy interactions by circlar flow dia$ram• (he second model is )rodction #ossibility frontier *))+ & e$% cars
in hori'ontal a-is *./// and com#ters */ or cars */, com#ters*0/// or cars 1//, com#ters 2///%
• )ositi!e !s normati!e3 doctor !s economist3 bro4en window fallacy
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BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
OODS !SER"ICES
OODS !SER"ICES
$ CONSUMPTION$ RE"ENUE
CIRCULAR FLOW MODEL
http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter2/origin_of_the_idea.html
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(he Circlar +low of (he Circlar +low of )rodction and Income)rodction and Income
• (he circlar flow shows how #rodction of $oods and ser!ices $enerates income forhoseholds and how hoseholds #rchased $oods and ser!ices #rodced by firms%
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COUR=E CO3TE3T
Ma!ro e!o,o"! !o,!e's ? 7P3P +,flao, ro.h rae e!
Co,su"'o, +,)es"e, fu,!o,s
+,flao,
Areae de"a,d a,d su''ly
+,flao, a,d u,e"'loy"e,
Mo,eary a,d fs!al 'ol!y
+,er,ao,al rade BOP fore, e!ha,e "are a,d e!ha,e rae
>,a,!al "are
Mo,ey a,d "o,ey "are
Labor Mare
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RE>ERE3CE=
Ma,.8 Ma!roe!o,o"!s
Paul R Hru"a, a,d Maur!e
Obsfeld8 +,er,ao,al e!o,o"!s
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7+=TR+BUT+O3 O> MARH=
Class Ae,da,!e8 05
IuJClass Tes8 10
Md
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MACRO ECONOMICMACRO ECONOMIC)RINCI)5ES)RINCI)5ES
• MICRO ECONOMICS AND MACROECONOMICS
• 6OA5S O+ MACRO ECONOMICS 6rowth7 #
Inflation7 down
8nem#loyment7 down
+lctations7 Small
+orei$n sector7 E-#ansion
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• Macroeconomics focses on two basic isses7
.%5on$9rn economic $rowth, or the factorsbehind the rise in li!in$ standards in moderneconomies%
2%+lctations in economic #erformance7
• An economy is considered to be in a recession whenit fails to $row for at least si- consecti!e months%
• At other times, nem#loyment may not be a
#roblem, bt we become concerned abot sstainedincreases in #rices, or inflation%
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Gross domestic product (GDP) is a measure of the total(aggregate) market value of _______________________produced by all ________________________ of aterritory or an economy over a specified period of time,usually a year or a quarter.
!"ample# $n %&&%, 'ong ongs GDP as *+,%-. billion.
$n %&&/0&, 1angladesh2s GDP 3k.,4+- 5illion (6urrentPrices) or roughly */- billion
What is GDP ?
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Key Points Parade
monetary va#e
E%ame'
Three 'a!s of !or, flaes a,d s
!a,s of !or, sou' !a,,o be added u'
oeher
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National Ot#t and :aleNational Ot#t and :aleAddedAdded
• National Ot#t7 is the sm of allot#t #rodced by all firms in theeconomy %
;t, one firm’s ot#t cold beanother firm’s in#t, which means
that some firms #rodce ot#t thatare sed as in#t by other firms %
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(herefore, if we add the(herefore, if we add theot#t of all firms, we willot#t of all firms, we will
obtain a total ot#t thatobtain a total ot#t thate-ceeds the !ale of thee-ceeds the !ale of theeconomy’s actal ot#t , soeconomy’s actal ot#t , so
we will o!erestimate thewe will o!erestimate the!ale of the ot#t #rodced!ale of the ot#t #rodcedby the economy %by the economy %
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E-am#leE-am#le
• / .?/
(otal !ale of ot#t .// .0/ .?/ @./
ere, we ha!e a #roblem of Doble Contin$
(o a!oid this #roblem, we measre the !ale of ot#t by sin$
The Value Added Concept
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(he :ale Added(he :ale Added
• It is the the mar4et !ale of the ot#t #rodcedby the firm mins the #rchases from other firms7 (herefore
• :ale Added B Mar4et :ale & #rchases
by a firm of ot#t from other
#rodced firms
lE l
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E-am#leE-am#le
• :ale added B mar4et !ale of & #rchase from
by a firm ot#t other firms
• :ale added by
/
(otal !ale added B = @./ 9 = 20/ B =.?/
by all firms in the economy
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Measrement of National IncomeMeasrement of National Income
and )rodct * 6D) and )rodct * 6D)
• If we add # the total flow ofe-#enditre on domestic ot#t, thisis called the E-#enditre
A##roach %
• If we add # the total flow of income
$enerated by the flow of domestic#rodction, this is called the IncomeA##roach %
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I% 6D) from the E-#enditreI% 6D) from the E-#enditresideside
• (he 6D) for a $i!en year is calclated by,
addin$ # the e-#enditre needed to#rchase the final ot#t #rodced in the
year % (herefore, the !ale of ot#t or6D) is the sm of for cate$ories 7
Consm#tion In!estment 6o!ernment e-#enditre Net
E-#ort
6D) B C I 6 * & M
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• Consumption expenditure:
• Incldes e-#enditre on all $oods and ser!ices
#rodces and sold to their final sers drin$ the yearsch as7 hairct, dental care, food, drable $oods,non9drables $oods, and clothes%
• Investment expenditure:
• incldes e-#enditre on $oods not for #resent
consm#tion% (his incldes7 in!entories *stoc4s ofin#ts, ca#ital $oods sch as factories, machines,warehoses, and residential hoses%
• Gross investment7 is the total in!estment that
occrs in the economy which is di!ided into two#arts7 replacement investment and net investment.
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• Replacement investment7 is theamont of in!estment that Fstmaintain the le!el of e-istin$ ca#ital
stoc4 *it is called the capitalconsumption allowance ordepreciation%
• Net investment B $ross in!estment9re#lacement in!estment%
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• Government purchases of goods
and services:• (his incldes $o!ernment #rchases of
crrently #rodced $oods and ser!ices %
• Note that not all $o!ernment e-#enditreis conted as a #art of 6D)%
• All transfer paymentsare e-clded sincethey are not made in retrn for crrently
#rodced $oods and ser!ices% +ore-am#le7 social secrity #ayments forretired #eo#le *#ensions%
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• Net exports:
•
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E-am#leE-am#le
• 6i!en the followin$ data, calclate the6D)
C B = 02G. 3 I B = 110 3 6 B = H>>
B = 1/ 3 M B = .>/
6D) B 02G. 110 H>> * 1/ &.>/
B = @H/H
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• Interest7 incldes interest earnedon ban4 de#osits and on loans tofirms%
• "rofit7 incldes both di!idends*#rofits #aid to the owners of firmsand retained #rofits by firms%
• No factor paments:
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• No factor paments:• (hese #ayments incldes indirect taxes and
de#reciation%
• Note that ta-es will be inclded when we calclate 6D)from the income side since they re#resent incomeclaimed by the $o!ernment%
• Note also that we ha!e to sbtract governmentalsubsidies on $oods and ser!ices since these #ayments
allow incomes to e-ceed the mar4et !ale of ot#t%• So, indirect taxes net of subsidies will be added to the
for com#onents of factor #ayments in order to $et theNet #omestic "roduct$
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• #epreciation7 is the !ale of ca#italthat has been sed # in the #rocessof #rodcin$ final ot#t% It is the!ale that mst be rein!ested%
• It is #art of $ross #rofits bt becase
it is needed to com#ensate forca#ital sed # in the #rodction#rocess, it is not #art of net #rofit%
• Addin$ de#reciation to net domestic#rodct $i!es Gross #omestic"roduct %G#"&%
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6D) from the Income Side6D) from the Income Side• E-am#le7• Factor paments B
wa$es rent interest #rofit
2H00 2/ 0HG G>2 B = @//.
• Net #omestic "roduct B factor #ayments * indirectta- & 6o!t% sbsidies B @//. *@2@ 9 ./ B =@@.>
• G#" B net domestic #rodct De#reciation
B @@.> >/? 9 *statistical discre#ancy .@
B = @H/H
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6D) :S 6N)6D) :S 6N)• 6D) 7 Measres the !ale of total
ot#t produced domestically bysmmin$ the !ale added by each
indstry%
• 6N) 7 Measres the income recei!ed
by residents of the country nomatter where that income was$enerated%
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Sorces of differences betweenSorces of differences between6D) and 6N)6D) and 6N)
• .% Some local #rodction creates factor income forforei$ners which will be sent *at least #artiallyabroad and ths, it is not a #art of the contry’s 6N)*and it will be conted as a #art of the contry’s
6D)%
• 2% Some of the local residents earn income as areslt of forei$n in!estments which will be conted asa #art of the contry’s 6N) *bt not in the contry’s
6D)%
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6D) :S% 6N)6D) :S% 6N)
• 6D) J !ale of domestic based assets owned by forei$ners KK%
!ale of forei$n based assets
owned by local residents % KK%
JJJJJJJJJ
B 6N)KK%
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E-am#leE-am#le• 6i!en that the !ale of 6D) B = @H/H
and the !ale of domestic based assetsowned by forei$ners eLals to = 2/// ,and the !ale of forei$n based assets
owned by the local residents eLals to =0/// % +ind the !ale of the 6N)
• 6N) B @H/H & 2/// 0/// B = >H/H
• If 6N) 6D) the contry is a netcreditor
• If 6N) 6D) the contry is a net debtor
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Dis#osable )ersonal IncomeDis#osable )ersonal Income
• It is the #art of national income that isa!ailable to hoseholds to s#end or tosa!e%
• (o calclate the dis#osable income weha!e to sbtract from 6D) the #artsthat are not a!ailable to hoseholds
sch as7 de#reciation, ta-es, retained#rofits, interest #aid to instittions, andadd transfer #ayments%
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(otal :ale, )rodcti!ity and )er(otal :ale, )rodcti!ity and )erCa#itaCa#ita
• 6D) B #er ca#ita 6D) or how mchtotal #o#lation there is on a!era$e for each
#erson
• 6D) Ba!era$e ot#t #er em#loyedwor4er
P of #eo#le em#loyed
• 6D) Bot#t #er hor of labor in#t
(otal P of wor4in$ hors
RealReal
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RealRealNational IncomeNational Income
• 6i!en the followin$ data below, calclate both thenominal and the real national income for 2 years%Assmin$ that year 2 is the base year%
Qantity #rodced )rices
>
Calclation of NominalCalclation of Nominal
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Calclation of NominalCalclation of NominalIncomeIncome
• Nominal income B crrent crrent
Lantities #rices
(herefore 7
• Nominal income for year . eLals to 7* .// ./ * 2/ >/ B = 2///
• Nominal income for year 2 eLals to 7
* ../ .2 * .G >> B = 22//
Calclation of RealCalclation of Real
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Calclation of RealCalclation of Realincomeincome
• Real income B crrent #rices ofthe Lantities baseyear
(herefore 7
Real income for year . eLals to 7
* .// .2 * 2/ >> B = 20//
Real income for year 2 eLals to 7
* ../ .2 * .G >> B = 22//
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REA5 :S NOMINA5 6D)REA5 :S NOMINA5 6D)• )rices and Qantities
• 6D) may rise becase*a the economy is #rodcin$ lar$erLantities of $oods and ser!ices3 *b the $oods and
ser!ices are sold at a hi$her #rice% Se#arate the two effects
• ear )rices of D Qantity )rice of ;; Qantity
• 2//> =. .// =2 >/
• 2//G =2 .>/ =0 .//
• 2//1 =0 2// =@ .>/
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• Calculating nominal G#":
• 2//>7 *=. #er D .// D *=2 #er ;; >/ ;;B=2//
• 2//G*=2 #er D .>/ D *=0 #er ;; .//;;B=G//
• 2//17*=0 #er D 2// D *=@ #er ;; .>/ ;;B=.,2//
• Calculating Real G#" %'ase ear ())*&
• 2//>7 *=. #er D .// D*=2 #er ;;>/ ;;B=2//• 2//G7 *=. #er D .>/ D *=2 #er ;; .// ;;B=0>/
• 2//1=. #er D 2// D *=2 #er ;; .>/ ;;B=>//
• G#" #eflator:
• 2//>7 *=2//=2//.//B.//
• 2//G7*=G//=0>/.//B.1. *ow mch #rice rose• 2//1=.2//=>//.//B2@/
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Im#licit 6D) DeflatorIm#licit 6D) Deflator
• Is an implicit price index that com#aresthe nominal and the real 6D) o!er a$i!en #eriod of time%
• (his inde- measres the change in prices o!er that #eriod % (herefore,
• Im#licit 6D) B 6D) at crrent #rices J.//
deflator 6D) at base year #rices
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E-am#leE-am#le• 6i!en that 7
S##ose, 6D) at crrent #rices for year . B = 2///
* Nominal 6D) of year ., and
6D) at base year #rices for year . B = 20//
* Real 6D) for year . , therefore
• Im#licit 6D) Deflator B 2/// .// for year . 20//
B ?G%H
• (his means that the #rice le!el of year . is ?G%HT of the #ricele!el of year 2 *the base year%
• Note that we can se year . as or base year%
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6D) AND NA(IONA5INCOME
6D) B >>.0%?
)ls7 net factor #ayments *Income from ca#italand em#loyment abroad & those sent abroad
./%1ELals 6N) B>>2@%> 5ess7 de#reciation B>H@%?ELals NN) B@H2H%? 5ess7 sales and e-cise ta- B@0H%2
5ess bsiness transfers B 21%1 5ess statistical discre#ancyB?%.ELals National Income B @@>H%G
NA(IONA5 INCOME AND
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NA(IONA5 INCOME AND)ERSONA5 INCOME
National Income B ++*,$-
5ess7 contribtion to social insrancesecrity B >/.%1
5ess7 cor#orate retained earnin$ B .H@%2
)ls7 nonbisness interest B 20.%2
)ls7 transfer #ayments from $o!t *social secrity and bsiness BG?@%H
ELals #ersonal income B @G1H%?
5ess7 income ta- B G2.%/
ELals7 )ersonal dis#osable income%
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Ille$al Acti!itiesIlle$al Acti!ities
•E-am#le 7
•Dr$s trade
•6amblin$•5iLor
•All sch acti!ities are notinclded in the !ale of the6D) %
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8nre#orted Acti!ities8nre#orted Acti!ities
•(hese are le$al acti!ities, btare not re#orted for ta-
#r#oses %
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Non9mar4et Acti!itiesNon9mar4et Acti!ities
•Any do it yorself acti!ity
and any !olntary wor4 %
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Economic ;adsEconomic ;ads
• )olltion, con$estion, and otherdisamenities associated with economic$rowth are called economic bads
and are not reflected *measred inthe calclation of 6D) or 6N)%
• +or e-am#le, the !ale of the dama$e
done by the acid rain is not dedctedfrom the 6D) or 6N)%
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Do the Omission Matter Do the Omission Matter
• If we wish to measre the flow of $oods andser!ices through the market sector of theeconomy, then most of these omissions willnot matter%
• ;t, If we wish to measre the overall flow ofgoods and services available to satisfy the#eo#le’s wants re$ardless of the sorces of
$oods and ser!ices , then the omissionsare ndesirable%
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6rowth !erss De!elo#ment6rowth !erss De!elo#ment
• Economic $rowth may be one as#ectof economic de!elo#ment bt is notthe same
• .conomic gro/th:&A measre of the !ale of ot#t of
$oods and ser!ices within a time #eriod
• .conomic #evelopment:&A measre of the welfare of hmans in asociety
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• Other considerations of hman welfare7
• )olitical freedoms
• Sstenance
• Sstainable de!elo#ment• Self esteem
• )ro#ortion of acti!ity in different sectors ofthe economy7
& )rimary& Secondary
& (ertiary
Measrin$ Real :erss NominalMeasrin$ Real :erss Nominal
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Measrin$ Real :erss NominalMeasrin$ Real :erss Nominal6D)6D)
G#" #ata for a 0imple .conom
1uantit "roduced "rice
Nominal G#"2ear Cars
Computers Cars Computers
2//G @ . =./,/// =>,/// =@>,///2//1 > 0 =.2,/// =>,/// =1>,///
• (o calclate real 6D) we se constant#rices% 1uantit
"roduced
"rice
2ear Cars Computers Cars Computers Real G#"
2//G @ . =./,/// =>,/// =@>,///
2//1 > 0 34)5)))
3*5))) =G>,///
ro.h of real 7P8
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)ROD8C(I:I()ROD8C(I:I(• )rodction and #rodcti!ity & income differential
• Daniel Defoe’s famos no!el Robinson Crsoe & a sailorstranded on a desert island
• Catches own fish, $rows own !e$etables, ma4es own cloth& a sim#le closed economy%
• If Crsoe is $ood at all acti!ities, he is well3 if not li!es#oorly%
• )rodcti!ity is the 4ey in Crsoe’s li!in$ standard%
• Americans li!e better than than ;an$ladesh not becase
America is bi$$er bt becase America’s labor is more#rodcti!e%
DE(ERMINAN(S O+DE(ERMINAN(S O+
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DE(ERMINAN(S O+DE(ERMINAN(S O+)ROD8C(I:I()ROD8C(I:I(
• )hysical ca#ital #er wor4er & saws, lathes anddrill for wood wor4er3 so#histicated than basictools%
• man ca#ital #er wor4er & 4nowled$e, s4ills
• Natral ca#ital #er wor4er &land, ri!ers, mineralde#osits%
• Renewable *forest and non9renewable *oil
• (echnolo$ical 4nowled$e7 nderstandin$ of howworld wor4s3 hman ca#ital transmits it to laborforce
-
8/9/2019 EW Macro 1
66/69
SO8RCES O+ 6RO
-
8/9/2019 EW Macro 1
67/69
SO8RCES O+ 6RO
-
8/9/2019 EW Macro 1
68/69
SO8RCES O+ 6RO
-
8/9/2019 EW Macro 1
69/69
SO8RCES O+ 6RO