MGRECON 301
Global Economic
Environment of the Firm
Professor John Coleman
Duke University
Fuqua School of Business
2012
Rethinking the Boundaries of Business School
Production and
Long-Term Growth
Sustained Growth and Country-Level Income Inequality are Modern Phenomena
World-Wide Per-Capita GDP
Most of the World is Poor
Total 2007 World Population: 6.6 billion
The 21st Century may be the
Century of Convergence
2007 population
• 6.6 billion - World
• 1.3 billion - China
• 1.1 billion - India
China and India represent 36
percent of the world’s population
How does output increase?
Key to our analysis of growth will be the production function
Can boost output by increasing factor inputs
or using inputs more efficiently
Aggregate Production Function
• Aggregate production function for the US:
y = A k.3n.7
–
–
–
–
y = real output (income)
k = physical stock of capital
n = labor input per unit of time
A = level of efficiency or total factor productivity
(TFP)
Calibrating the
Aggregate Production Function
The production function is motivated by this fact:
• Labor income share is consistently 70% of national
income
• Capital income share is 30% of national income
Labor Income Share of GDP
Wn/Y
1.0
Employee
Compensation
7.5%
9.9%
0.9
0.8
0.7
Proprietors' and
Rental Income
9.2%
0.6
0.5
0.4
Corporate
Profits (NIPA)
0.3
0.2
0.1
Distribution of National Income, 1994
Employee Compensation as Percentage of GNP
1959-1999 (very stable over time at 70%)
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
0.0
1959
Net Interest
1961
73.4%
US Production Function: Measurement
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
y
k
4612
4725
4624
4810
5138
5330
5490
5648
5863
6060
6139
6079
6244
6384
6609
6743
6995
7270
7560
7862
4491
4655
4765
4849
5004
5189
5328
5445
5572
5708
5830
5892
5979
6094
6258
6473
6566
6716
6815
6917
n
99.3
100.4
99.5
100.8
105.0
107.2
109.6
112.4
115.0
117.3
117.3
116.9
117.6
119.3
123.1
124.9
126.7
129.6
131.5
133.5
A
14.80
14.89
14.56
14.93
15.35
15.53
15.62
15.69
15.92
16.11
16.11
16.04
16.34
16.44
16.52
16.52
16.80
17.16
17.59
18.01
%A
y  A k n
0.3 0.7
0.6
-2.2
2.5
2.8
1.1
0.6
0.4
1.5
1.2
1.2
-0.7
1.8
0.6
0.5
0.0
1.7
2.1
2.5
2.4
• y, k, measured in billions
of 1992 dollars.
• n measured in millions of
workers.
• A is computed by using
the production function
A y/k n
0.3 0.7
Output per worker
• Labor productivity is output per worker
y
k
 A 
n
n
0.3
• Living standard is determined by
• A: efficiency (or TFP)
• k/n: capital per worker
International Differences in Output per Worker
contribution from
Source: Hall and Jones, QJE(1999)
Output per Worker = (Capital per Worker contribution) X (TFP)
Growth Accounting
and Efficiency of the Economy
•
Growth-accounting equation:
y A
k
n

 0.3 
 0.7 
y
A
k
n
•
The labor contribution to growth:
0.7 * % growth of labor
•
Capital contribution to growth:
0.3 * % growth in capital
•
Growth-accounting equation (per capita):
y / n A
k / n

 0.3 
y/n
A
k/n
Growth Accounting
for the United States, 1948-2000
growth rate
Annual
Growth
Rate of Y
Annual
Growth
Rate of A
Contribution
of K
Contribution
of N
1948-1973
4.0%
1.8%
1.5%
0.7%
1973-1995
2.7%
0.1%
1.3%
1.3%
1995-2000
4.2%
1.9%
1.5%
0.8%
growth rate per capita
Annual
Growth
Rate of Y/N
Annual
Growth
Rate of A
Contribution
of K/N
1948-1973
3.0%
1.8%
1.2%
1973-1995
0.9%
0.1%
0.8%
1995-2000
3.0%
1.9%
1.1%
Recent Productivity in the US
Does TFP growth explain
convergence?
TFP relative to the US
Years Canada France Germany Italy
Japan
Korea United Kingdom
1947
0.812
1948
0.793
1949
0.800
1950
0.820
0.531
0.462
1951
0.804
0.521
0.493
1952
0.840
0.526
0.522
0.590
0.434
1953
0.841
0.552
0.531
0.615
0.443
1954
0.817
0.570
0.571
0.621
0.463
1955
0.832
0.567
0.609
0.641
0.482
1956
0.876
0.586
0.631
0.670
0.494
1957
0.859
0.601
0.652
0.674
0.507
1958
0.860
0.600
0.660
0.698
0.496
1959
0.841
0.606
0.681
0.705
0.505
1960
0.843
0.643
0.737
0.716
0.551
1961
0.838
0.654
0.748
0.740
0.601
1962
0.836
0.658
0.742
0.740
0.564
1963
0.846
0.667
0.740
0.730
0.588
1964
0.851
0.679
0.768
0.731
0.621
1965
0.859
0.685
0.785
0.762
0.613
1966
0.864
0.692
0.770
0.770
0.631
1967
0.859
0.713
0.752
0.801
0.658
1968
0.873
0.719
0.810
0.808
0.708
1969
0.868
0.757
0.869
0.851
0.740
1970
0.914
0.788
0.909
0.876
0.779
1971
0.916
0.789
0.900
0.830
0.768
1972
0.909
0.791
0.892
0.827
0.773
1973
0.907
0.806
0.906
0.849
0.772
Source: Productivity, Vol. 2, by Dale W. Jorgenson, MIT Press, 1995.
0.240
0.239
0.235
0.246
0.252
0.245
0.265
0.271
0.275
0.303
0.316
0.313
0.310
0.348
0.668
0.673
0.687
0.686
0.678
0.700
0.701
0.677
0.677
0.689
0.677
0.678
0.699
0.706
0.704
0.742
0.769
0.770
0.775
Growth Accounting is Everywhere
TFP Convergence Assumption
Level of TFP
U.S TFP growth at constant 1.3%
Developing country TFP
Income per capita relative to the US (time)
Why Care About TFP?
• Sustained Growth not possible without TFP growth
• Incentive to invest related to return to capital---this falls
rapidly to zero without TFP growth
• Without TFP growth income will stop growing
MPK  0.3 * A  k
0.7 0.7
n
Law of Diminishing Returns
MPK  0.3 * A  k
MPK
Capital
0.7 0.7
n
Soviet Union had no TFP growth—return to capital fell to zero
Growth from 1,000,000 BC to now
• Pre-Industrial Revolution stagnation in per-capita income
• Industrial Revolution and TFP
• Growing Income Inequality
• 21st Century may be the Century of Convergence
Lucas: The Industrial Revolution
• Malthusian
trap
• Fixed vs.
reproducible
inputs
• Demographic
transition
Understanding efficiency
• Higher A implies that the economy is more
efficient
• More output can be produced with the same
inputs (labor and capital)
• What drives A?
Innovation and TFP Growth
Technology Adoption Rates Differ
Dramatically Across Countries
Appropriate Technology?
Learning by doing and TFP growth
In New Economy same effect is achieved by using computers
and other IT --- this also raises y/n.
What determines TFP?
Relationship between Income and Growth
Open Countries Tend to Converge
Open: (1) effective protection rates < 40%, (2) quotas on < 40% of
imports, (3) no currency controls or currency black markets, (4) no
export marketing board, and (5) not socialist.
Institutions that Foster Growth
Different types and purposes of institutions
• property rights
• regulatory institutions
• macroeconomic stabilization
• social insurance
• conflict management
The Colonial Origins of Institutions and Development
• Life expectancy for European
colonists differed greatly by
region of colonization
• Low mortality regions
encouraged the development of
governance that replicated
home institutions (e.g., United
States, Australia, and New
Zealand)
• High mortality regions
encouraged the development of
extractive states which set up
repressive institutions to
maximize the extraction of
resources (e.g., Congo and
Gold Coast)
• Early development of
institutions have persistent
effects on today’s institutions
Source: Acemoglu, Johnson, and Robinson, AER(2001)
• But institutions can still
change today
Growth and Radical Institutional Change: The French Revolution
Ancien Régime in France/Europe
• Landed nobility imposed feudalism/serfdom, which
tied peasants to land and restricted a free labor market
(recall that the vast majority of labor was in
agriculture)
Growth under new regime
Growth under old regime
• Urban oligarchy controlled major occupations by
guilds, significantly limiting competition and
restricting adoption of new technology
• Nobility and clergy were exempted from many
taxes, and indeed imposed taxes of their own, and
were subject to different laws and courts
French Revolution of 1789
• Abolished feudalism
• Abolished guilds and internal tariffs
• Significant reduction of power of nobility and clergy
Source: Acemoglu, Contoni, Johnson, and Robinson,
“The Consequences of Radical Reform: The French Revolution,” 2009
• Declaration of equality before the law for all
citizens
French Revolution Expanded into parts of Europe
• Toppled established regime in Belgium, the
Netherlands, Italy, Switzerland, and parts of Germany
• New regimes persisted even after the French left
The World Bank
Created out of Bretton Woods in 1944
• Prior to 1980 focus on loans tied to
specific projects in developing countries
• Later focused on adjustment lending that
were meant to encourage policies to
promote overall growth and lower inflation
• Some successes: Ghana, Mauritius
What went wrong?
• Debt relief created poor incentives
• Poor performing countries received as
much or more follow-on loans as other
countries
• WB/IMF gave 18 adjustment loans to
Côte d'Ivoire, despite persistent budget
deficits of 14 percent of GDP
• WB/IMF gave 22 adjustment loans to
Pakistan, despite persistent budget deficits
of 7 percent of GDP
• Adjustment lending to many corrupt
governments: 46 adjustment loans to
Congo, Bangladesh, Liberia, Haiti,
Paraguay, Guyana, and Indonesia
Source: Easterly, The Elusive Quest for Growth, 2002.
Charter Cities?
Optional Topic
from www.chartercities.org
Charter cities offer a truly global win-win solution. These cities address global poverty by giving people the
chance to escape from precarious and harmful subsistence agriculture or dangerous urban slums. Charter cities let
people move to a place with rules that provide security, economic opportunity, and improved quality of life.
Charter cities also give leaders more options for improving governance and investors more opportunities to finance
socially beneficial infrastructure projects.
All it takes to grow a charter city is an unoccupied piece of land and a charter. The human, material, and financial
resources needed to build a new city will follow, attracted by the chance to work together under the good rules that
the charter specifies.
20 min video http://www.chartercities.org/video
Paul Romer
Course Outline
• Growth and Institutions
• Labor and Trade
• International Capital Flows;
Supply-Side Economics
• Financial Crisis
Growth and
Institutions
2009 per-capita
real (PPP) GDP
for select countries
Labor and Trade
International
Capital Flows
Supply-Side
Economics
Financial Crisis