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Econ 231.docx

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Queen's University
ECON 231
Ian Keay

Econ 231- Emergence of the Modern Industrial Economy 11/15/2012 11:12:00 AM Alex Fraser [email protected] Welfare vs income Maximizing income Define MEG SWF- F(consumption, health, freedoms, leisure, environmental quality, education etc) Rate Consumption= g ($ value market goods and services non market goods and services) $ value reflects quality Income-> Consumption-> Welfare Money and cash doesnt determine welfare, how it is spent determines welfare (not P but the Q). We must strip out the price effect Key Question= are other determinants normal or inferior Kuznets curves for quality , freedoms and environment How to measure income-> real income per capita Nominal GDP/population= PtQt/Pop.t To remove the Ps we need a price index Must remove P effects Vary across time and space o Change in price and composition Laspeyers price index uses original basket No Q adjustment -. P growth high Paasche price index uses final basket Q adjustment complete -> P growth minded Must conceder the change in monetary value Sources of micro data -> public institutions, court records, church records, tax records So how does any of this help us? Modern economic growth Rapid increases in income per capita Persistent increase in income Unambiguously welfare improvement o Increase in income due to increased productivity Modern Economic Growth 11/15/2012 11:12:00 AM 1) Rapid increase per capita(2-3% increase) 2) Persistent increase per capita 3) increase/capita that are unambiguously welfare improving ie income that doesnt decrease other self determinants (busts occur due to failure of this) this can be done through suppression of other things like education and health care 1 and 2 are usually together, but very rare to see if not impossible for all 3 to be together total factor product activity will show us this Solow Residual= total factor productivity= tfp= A Q=f(A,L,K,M) o K is machine hours o M is other things (raw materials and intermediate goods, hard to measure) Assume Cobb-Douglas Neutral A, line shifts to right/upwards parallel CRS Q= AL^aK^bM^c recall a=elasticity of output with respect to L= cost or income share A+b+c=1 All scale effects are then buried in A Take natural log and derivative wrt time lnQ=n A+a lnL+BlnK= ClnM dlnQ/dt=dlnA/dt=a dlnL/dt + B dlnK/dt+ C dlnM/dt Q=% change of Q over time = dlnQ/dt= Q dQ/dt Q=A+aL+BK=CM A= residual (unexplained) Q growth =Q-aL-Bk-CM recall GDP= sum VA(value added) over all producers o =PQ-WmM HOW TO FIND GROWTH RATE Xt= X0(1+g)^t Eg 2200=1000(1+g)^40 2.2^1/40= 1+g G=.02= 2% When A increases (urbanization globalization) Input quality Technology Scale Market efficiency Institutional quality Transition in UK this industries were unique to Brits Big increase in change in K Big change in A Cotton Coal Steam Transport
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