Section+4 - Sec$on 4 PS3 1 Agenda •  US...

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Unformatted text preview: Sec$on 4 PS3 1 Agenda •  US Inven$veness •  More about Monetary aggregates •  Interna$onal Trade Model 2 For Q1 We Need 1.  The series of Real GDP (Ca9) 2.  The series of Total Patents Granted in US (Cg30) for 1821 ­1937 3.  The series of Total Patents Applica$ons in US (Cg27) for 1936 ­2000 4.  Use the number of patent granted for 1821 ­1936 for the Total Patent Applica$ons 1820 ­1935 5.  Calculate: 6.  Plot both on same graph with year on horizontal axis 3 –  Real GDP Growth Rate (1820 ­2000) –  Patent Applica$ons Growth Rate (1820 ­2000) Q1 – Patents & GDP Growth Rates GDP Growth & Patent Applica4on Growth Rate 25.00% 20.00% 15.00% GDP Growth Rate 10.00% 20.00% 5.00% 0.00% 0.00% 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000  ­5.00%  ­10.00%  ­15.00% GDP Growth Rate Patents Applica$on Growth Rate  ­20.00% 80.00% 60.00% 40.00% Patent Growth Rate  ­40.00%  ­60.00% 4 GDP Growth Rate 10.00% 15.00% 20.00% 25.00% 0.00% 5.00%  ­5.00%  ­10.00% GDP Growth & Patent Applica4on Growth Rate A Closer Look At the Early 19th c. GDP Growth Rate Patents Applica$on Growth Rate  ­60.00%  ­40.00% 0.00% 20.00%  ­20.00% Patent Growth Rate 1820 1822 1824 1826 1828 1830 1832 1834 1836 1838 1840 1842 1844 1846 1848 1850 1852 1854 1856 1858 1860 1862 1864 1866 1868 1870 1872 1874 1876 1878 1880 1882 1884 1886 1888 1890 1892 1894 1896 1898 1900 40.00% 60.00% 80.00% 5 Real GDP ($M) 10000000 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 0 GDP & Patents GDP & Number of Patent Issued Real GDP Patent Granted 20000 0 40000 60000 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 80000 100000 120000 Number of Patents Issued 140000 160000 180000 6 The Unimagina$ve ‘70’s ? •  Produc$vity is down – Patent applica$ons FLAT 7 Or Just Budget Cuts… Patents granted Patent Office Examiners 8 For Q2 we need: 1.  2.  3.  4.  Nominal GDP data (Ca10) (1867 ­1947) Consumer Price Index (Cc2) (1867 ­1947) M3 data (Cj47) Calculate: –  Nominal GDP / M3 Ra$o •  No$ce – Nominal GDP in $Million & M3 in $B –  Plot 9 Nominal GDP ($M) 0.000 1.000 2.000 3.000 4.000 5.000 6.000 Ra$o of Nominal GDP to M3 Nominal GDP/M3 Nominal GDP/M3 1867 1869 1871 1873 1875 1877 1879 1881 1883 1885 1887 1889 1891 1893 1895 1897 1899 1901 1903 1905 1907 1909 1911 1913 1915 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 10 Nominal GDP / M3 Ra$o •  For defini$ons of the various monetary aggregates – check sec$on 3 slides •  No$ce: up un$l 1955 M2 & M3 are very close 180 160 140 120 100 80 60 40 20 0 1867 1871 1875 1879 1883 1887 1891 1895 1899 1903 1907 1911 1915 1919 1923 1927 1931 1935 1939 1943 1947 M1_Currency_Cj43_BillionDollars M2_Total_Cj45_BillionDollars M3_Cj47_BillionDollars 11 Nominal GDP / M3 Ra$o •  Nominal GDP / M3 Ra$o declines → The growth rate of (Nominal GDP/M3) is nega$ve: ⎛ YNo min al ⎞ ˆ ˆ Growth _ rate = YNo min al − M 3 < 0 ⎝ M3 ⎠ •  Where: –  Y N o min al  ­ is the growth rate of the nominal GDP ˆ –  M 3  ­ is the growth rate of the M3 aggregate ˆ 12 For The 2nd part of Q2 we need: 5.  Calculate: –  Infla$on rate (=price level growth rate) –  M3 Growth Rate 6.  Plot both on a single graph 13 M3 Growth Rate 10.00% 15.00% 20.00% 25.00% 30.00% 0.00% 5.00%  ­5.00%  ­15.00%  ­10.00% Infla4on Rate & M3 Growth Rate Infla$on Rate & M3 Growth Rate M3 Growth Rate Infla$on Rate  ­15.00%  ­10.00% 0.00%  ­5.00% 1868 1870 1872 1874 1876 1878 1880 1882 1884 1886 1888 1890 1892 1894 1896 1898 1900 1902 1904 1906 1908 1910 1912 1914 1916 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 5.00% Infla4on Rate 10.00% 15.00% 20.00% 14 Money Supply and Infla$on •  As Money supply increases → (price level = nominal prices) increase •  Using the Quan$ty Theory: M/P=kY –  The Real GDP : Y=(1/k)M/P is unaffected by the price level GDPRe al = ∑ Qi Pbase _ year i –  Compare to Nominal GDP: G DPNo min al = ∑ Qi Pi •  Increases with prices i •  Calculated with fixed prices that are used as constant weights 15 Apply Growth to the Quan$ty Theory ˆ = growth _ rate ⎛ 1 ⋅ M ⎞ Y ⎜ P⎟ ⎝k ⎠ ⎛1⎞ = growth _ rate ⎜ ⎟ + growth _ rate M P ⎝ k⎠ ˆˆ ˆˆ = 0+ M −P = M −P () •  The infla$on rate is: P M Y  ­ the difference ˆ = ˆ − ˆ between the growth rate of money supply ( M ) ˆ ˆ and the growth rate of the real economy (Y ) 16 Compara$ve Advantage •  •  •  •  The Real economy is about RELATIVE PRICES Two economies, China & US Two goods: Cars & Toys Star$ng from an equilibrium (current steady state), to produce an extra car : –  The US has to produce TUS less toys (the rela$ve price of a car in the US) –  China has to produce TChina less toys (the rela$ve price of a car in the China) 17 Compara$ve Advantage •  If TUS < Tchina → It is less costly to produce cars in the US than in China → –  The US has a compara$ve advantage in produc$on of cars –  An extra car in the world output of cars will affect less the total world output of toys – Op$mizes world output 18 In Autarky (no trade) Cars US US PToys Slope = US PCars ΔC ΔT ΔC China PToys Slope = China PCars ΔT China Toys For the budget line slope explana$on see slide 24 19 Compara$ve Advantage & Prices in Autarky •  Source of Compara$ve advantage – unequal factor endowment •  E.g. US is more capital intensive, has more skilled workforce → Higher produc$vity → higher wages → Labor intensive Toys are more expensive to produce •  As a result – the products with higher content of the abundant resources are cheaper in that country •  In Autarky – demand for both goods → labor and capital allocated to produc$on of toys → rela$ve price of cars in the US lower than in China 20 –  E.g. car in the US abundant in capital and steel With Free Trade •  Each country specializes in (shits produc$on towards) the products in which it has compara$ve advantage & prices for both goods are equal in both countries •  The rela$ve price of cars in the US increases (as toys are imported at lower cost) (conversely – the rela$ve price of toys declines) •  The rela$ve price of toys in China increases as cars are imported at lower prices from the US 21 –  E.g. US shits labor and capital from toys produc$on to cars With Free Trade – Same Prices Cars US PToys Slope = PCars ΔC ΔT ΔC ΔT China Toys 22 When Can Tariffs be Good •  When the country is impor$ng from a foreign monopoly •  Tariffs shit the demand curve facing the monopolist and results in a reduced markup for the monopolist –  The foreign monopolist absorbed some of the tariff incidence (decreases foreign profits hence foreign welfare) – as a result, price to home country consumers increase by less then the full tariff –  The home country collects full revenues from tariff – benefits home country welfare 23 The Budget Line slope •  In equilibrium – the indifference curve of consumers is tangent to the produc$on possibili$es fron$er at economy produc$on level •  The slope at the tangent is the same as the slope of the consumer budget constraint line –  Assume two goods x,y then the budget constraint line x ⋅ Px + y ⋅ Py = I is: –  x,y – are the amounts consumed of each good –  I is the consumer income 24 Budget Line Slope  ­ Intui$on •  The consumers has u$lity func$on U(x,y) – which they try to maximize •  On the indifference curve, the marginal u$lity from inves$ng the last $ in either goods should be the same: –  The last $ buys the consumer 1/Px units of x or 1/py units of y –  MUx*(1/Px ) = MUy*(1/Py ) –  Or – the slope of the indifference curve: –  MUx/ MUy= Px /Py (this is the Marginal Rate of Subs$tu$on or MRS) –  But : Mux = ΔU/Δx hence: –  MUx/ MUy = (ΔU/Δx)/(ΔU/Δy) = Δy/Δx = Py /Px 25 ...
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