ECO100Y1 Study Guide - Final Guide: Canadian Dollar, Creative Destruction, Nortel

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3 Aug 2010
Solow, denison, Krugman, Baumol, Lewis
progress occurs. The endogenous growth theory explains it
-an economy will always converge towards a steady rate of growth through tech. progress and labor force growth
-Total factor productivity is contribution to output that is not from labor and capital, TFP drives labor productivity by
80%, remains is due to higher capital ratio through time (but there is diminishing returns to capital)
-only 12.5% of growth in output per capita in the 1909-1949 period in the United States was due to factor accumulation
-- leaving 87.5% to be explained by technical progress! This is a bit dispiriting as it implies that the overwhelming
majority of the growth that is empirically observed is "outside" the explanatory power of the Solow-Swan growth model!
-difference between rich and poor countries explained by rich countries investing more and have lower population
growth rate, more capital per worker, higher labor productivity
-per capita growth will eventually cease as dimishing returns to capital set in, tech. progress can offset the tendency for
marginal product of capital to fall
-tech. change increases labor productivity and increases in labor productivity generate higher standards of living, greater
real wages and profits and larger gov;t tax revenue
1) -undistorted competition in the product market
- in order to have a healthy economy, the most productive firms should win
- more productive firms expand and take market shares,overall productivity of the country increases.
- less productive firms go out of business or increase productivity.
-Competition makes productivity increase,
-less intense competition, slower productivity growth.
-Market distortions explain difference between GDP per capita of US and other rich countries
2)-Innovations, allow innovators to make more profits, invest more, take market share away from competitors,
profits will return to normal after a period, in which the level of productivity is at a higher level
3)-Too much government influence restricts productivity growth
-Protection of less productive firms is a regular occurrence in industrial countries such as France, Germany and
-best practice retailers are prevented from expanding as fast as they can thus, productivity growth is slower.
-Too much government influence has proved that old factories and companies are protected against
bankruptcy while they keep productivity at a minimum.
Unsuccessful owners be allowed to fail and workers have to find new jobs.
-Product market distortions are much more important than labor market distortions.
-govt tax heavily on legitimate business as part of economy is informal
-If able to keep wage rates down, higher profits, the profits are invested back for higher economic growth more
investment(increase in capital equipment), industry expands, more labor demand
-Labor force leaving agriculture for higher pay
-labor management relationship is different in Japan
-lifetime labor vs high labor turnover in US
-the agricultural sector provides unlimited supplies of labor to industrial sector and pays a subsistence wage, as the
industrial sector expands, employment and output increase, share of profits increase
-eventually surplus labor is exhausted. Wage rate rises, real wage rise with increasing productivity
Krugman-Increasing GDP per capita
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e) 1) Put larger portion of the population to work-works for a while if a substantial fraction of population is
increase it to 105%.
2) Put a smaller fraction of output aside as investment for the future and devote more productive capacity to
manufacture goods for current consumption-can consume more for a while by investing less, will cut into
ability to consume later
3) Can import more without selling more-have to borrow or sell assets to pay for additional imports
4) can get a better price for exports so able to afford more imports-how to persuade foreigners to pay more
for goods, only way is to make the goods better, productivity
Krugman-1973, magic went away, economic growth is magic-labor productivity is magic as well
1991-avg American family income went up by 5%, got that from working longer hours
Two types of economists-Policy Entrepreneurs-offer politicians simple solutions to complex problems, analysis are
flawed-(thurow, prestowitz), wrong solutions
Policy entrepreneurs said countries must be competitive, is Canada going to be competitive, Krugman says countries are
not competitive, industries within the country is competitive
Policy entrepreneurs-countries with lower productivity will not be competitive, will fall backwards, Krugman-look at
comparative advantage, if countries engage in trade with comparative, both achieve strong trade
Economic war between US, Japan and Germany-Thurow, US decided to lose the battle
Krugman-problem between communitarian and individualistic capitalism
-suppose US demands Japan to increase imports from US, Japan retaliates, US counters
Solution: raise labor productivity in US, increase R&D funds, improve education, encourage US households to save
-Depression, runaway inflation, and civil war can make a country poor, but only productivity growth can make it rich
-only way in the long run to increase standard of living is to increase labor productivity
-in 1967, Fortune magazine surveyed American Industry, how much will real wage increase in the next 25 years, real
wage should increase 150%, u^Zµu[u]l of extrapolation from past data
Why did productivity growth slow down?
3 different stories that account for slowdown in US
1) Technological factors-no new basic technologies, except computers in the IT sector is coming forward, but it
takes a long time for a major new technology to have a major impact-industrial revolution-textile innovation,
takes years for real wage to increase
2) Sociological explanation-decline in education standards in the US, education standards was falling, motivation is
not the same, between 1960 and 1990, public school students increase by 10% in school, increase in teachers in
the same period 70%, the end product, high school system is still poorly educated,
3) Political explanation-Z]PZÆU]PPP}À[]vÀ}uvUo}]vv]À(}vvµµ}Z]PZ
taxes become more risk averse, workers choose leisure time, spend minimum time at job, more regulation-anti-
labor productivity, more hours for the same task
How does Krugman bring the magic back?
US had 2 key problems-low productivity and rising poverty(income distribution problem)
education, improved funding for R&D, encourage savings
worker(labor productivity)
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- that Japan's growth was the result of improvements in the quality of factor inputs -- health and education for
workers, for instance -- and improvements in the way these inputs are utilized in production -- due to
technological and organizational change, reallocation of resources from agriculture to non-agriculture, and scale
economies, is defensible.
-Improved resource allocation through economies of scale
-new firms become larger and more efficient, lower on their total average cost curve, increasing returns to scale
1) Research and Development and GDP fell, federal and private sector share in the fall of GDP
3) Decline in entrepreneurial and workforce ingenuity, inventive process, industries more risk adverse, labor force were
enjoying high incomes
ð/voµ]}v}(P}À[Pµo]}v~u}]vµ(}}µµU(}ZoZUvÀ]}vuvU]À]o]PZ-may not hire the best
person for the position
5) high marginal tax rates, disincentive for entrepreneurs to perform, and businesses also
6) inflation inefficiencies, double digit inflation, interest rate increased, limiting wage increase
7) Energy price increase-OPEC price increase for petroleum, less than $3 a barrel to over $20
8) Shift to the service sector, the labor productivity increase in service sector is much lower than in manufacturing
sector, 70-75% of value added is in service sector in industrial countries, hard to measure labor productivity ,
Is there a slowdown in productivity in the US?
labor productivity
-([óïZ]Zvµ]vdecline in US productivity represented as a departure from Long term
-in the long run, there is no greater importance to improved welfare of the country than improved productivity
-in the short run, labor productivity is subject to cyclical features, if there is a short recession-ô-82, what management
does is keep labor, output falls, sales falls, try to keep labor, decrease in labor productivity
-end of business cycle-rise in labor productivity
-1890-1970 Many fluctuations in labor productivity and total factor productivity
-long term labor productivity in US economy has been at 2% per year
-1950-1973, 3% labor productivity growth-due to huge post-war productivity investment, catch up in tech, in Europe and
Japan, once only phenomenon
changes in auto, airplanes, railway, into micro theory
-continuous innovation, routine innovation can be perceived to be an operation of the company, R&D is decision of firm
Research and development leads to technological change, leads to innovation, new goods and services, tech. transfer
-tech. change leads to productivity increases, higher rate of growth to higher real per capita incomes
-more profits higher standard of living, more jobs, more goods and services at cheaper prices, more tax revenue for
governments to help finance health, environment and infrastructure
-the only way an industrial country can increase its standard of living in the long run is through higher labor productivity
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