3-1.2. The Determinants of Production Capacity: Resources and Technology

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Do curso por University of Illinois at Urbana-Champaign

Country Level Economics: Policies, Institutions, and Macroeconomic Performance

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University of Illinois at Urbana-Champaign

Country Level Economics: Policies, Institutions, and Macroeconomic Performance

163 ratings

Curso 4 de 7 em Specialization Managerial Economics and Business Analysis

This course examines macroeconomic performance in the short run and the long run based on the economy’s institutional and policy environment. The first module develops a model of macroeconomy in the short run when the price level has its own momentum and does not respond much to supply and demand forces. The model enables one to see how GDP, interest rate, and exchange rate are determined in the short run and how they respond to macroeconomic shocks and policies. The second module starts the analysis of long-run equilibrium by examining the foreign exchange market. It then connects the long-run outcome with expectations about the future trends in the exchange rate at each moment, which constitute a key driver of the spot exchange rate in the short run. The methodology developed for this purpose can be applied to expectations concerning other macroeconomic variables as well. Finally, the long-run foreign exchange model is employed to derive a number of important lessons for the long run trends in currency values and competitiveness of producers in various countries. The third module examines the drivers of aggregate output in the long run and the mechanisms of adjustment from the short run to the long run. The model provides insights about why some countries are much richer than others and why some economies grow faster than others over decades. The analysis also sheds light on why inflation varies across countries or over time in the same country. The model is employed to analyze the sources of macroeconomic instability and the roles of fiscal and monetary policies in stabilization or destabilization of the macroeconomy. The final module discusses the characteristics of desirable macroeconomic policies and the reasons why actual policies deviate from them. It connects these deviations to country characteristics that one needs to take into account when assessing a country’s long-term macroeconomic environment. The module ends with a discussion of the institutional conditions that help bring about better fiscal and monetary policies. At the end of this course, you will be able to: • Understand how the market for aggregate goods and services interacts with the money market to shape the macroeconomic equilibrium that determines income, interest rate, and exchange rate in the short run. • Understand the links between the short-run and long-run processes. • Assess the dynamic effects of macroeconomic policies and understand the roles of globalization, government policies, institutions, and expectations in macroeconomic outcomes. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

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Module 3: Long-Run Economic Performance and Short-Run Adjustments

Why are some nations so much poorer than others? Why do some countries manage to grow fast over decades while others stagnate? What determines the real per capita income in a country in the long run? One goal of this module is to examine these fundamental questions in economics. The module also discusses the relationship between short-run and long-run equilibria and shows how the process of adjustment may lead to macroeconomic instability. It ends by examining the role of monetary and fiscal policies in stabilizing or destabilizing the economy as it goes through the adjustment process.

3-1.1. Understanding the Long-Run Output11:30

3-1.2. The Determinants of Production Capacity: Resources and Technology7:59

3-1.3. The Determinants of Production Capacity: Institutions17:02

Conheça os instrutores

Hadi Salehi Esfahani
Professor of Economics and Professor of Business Administration
Department of Business Administration, College of Business

In this video, we're gonna be focusing on resources and

technology as determinants of production capacity.

Recall from the previous video that we identified three types of

factors determining the production capacity: resources,

technology, and institutional capabilities.

In this video, we're gonna focus on the first two.

The third to the factors, institutional capabilities,

is the topic of the next video.

Now, the role of resources in determining production capacity.

Resources consist of human capabilities – effort, time,

energy – as well as physical capital and natural resources – land, energy, minerals.

Having more resources allows the economy to produce more.

For example, physical capital enables workers to

produce more and to use technologies that become available.

Human capital plays a central role in production capacity because

people bring together other resources and put them to use.

It's very tempting to think that if we work harder,

put in more hours,

use more capital, we're gonna continue growing.

But that's not actually the case.

We do produce more output with more work,

with more effort, with more capital,

but the rate at which the economy grows is gonna be declining as

the level of income rises, with increased resources.

So while having limited access to resources constrains an economy's growth,

having access to a lot of resources means

increased output but not necessarily continued growth.

The reason is that resources have diminishing returns.

Think about the amount of capital that you can use.

Think about the following example.

Suppose you have no computers at your work,

and you get one – that increases your productivity.

Then, you get a second computer,

let's say a laptop you can take home or take to other places,

and that also increases your productivity.

So the increase in productivity may not be as

high as was the case with the first computer.

Now if you get a third computer,

that also might be helpful in some situations,

but it's gonna be more marginal.

The fourth and fifth computers might be pretty useless and may actually take

your time with updating, with replacement, etc.

So there's diminishing returns to resources per person.

And, what is more is that when you have more resources,

then you have to deal with more depreciation,

and that takes some of your time and energy and

savings to replace the depreciated capital.

As a result, when the resources at your disposal increase,

your output increases at a diminishing rate while

the depreciation cost increases linearly, and at some point,

depreciation catches up with the increase in

production and it becomes more costly to maintain the level of output,

and at that point, output starts stagnating.

So having more capital,

working more hours increases output per capita,

but eventually the growth rate comes to a halt because

depreciation cancels the gains in output.

The notion that capital accumulation can bring about

long-term growth and prosperity used to be quite popular.

In fact, the policymakers in most developing countries used to think in those terms.

One good example of this is the Soviet Union after the Bolshevik Revolution.

Leaders of the country wanted to show that socialism works better than capitalism,

and their idea of how to show this was to

increase production by investing more and increasing the capital stock.

They did that but the capital stock started depreciating and they needed to replace it,

so a large part of the savings of people in

the Soviet Union went towards maintaining the capital stock.

Although in the 1930s,

Soviet Union was growing very fast,

by 1950s, it slowed down,

and after the 1960s,

there was not a whole lot of growth,

and that may have been one of the factors that led to the demise of Soviet Union.

Paying attention to the fact that

more resources are helpful but they have diminishing returns is

very central to understanding economic growth and designing policies for long-run growth.

Ultimately, per capita income grows when

people produce more with the same amount of resources.

That's known as technological change.

It's discovery, innovation, invention,

those kinds of things that enable people to produce more, produce new goods,

satisfy needs in ways that are less costly,

and as a result,

producing more without working much harder and

without setting aside a lot of production of the economy rather than consuming it,

putting it into investment in order to produce more,

because that kind of strategy has a lot of diminishing returns.

Human capital, physical capital are very good,

very helpful, but they are worthwhile when there's new technology to be implemented.

Before moving to the next topic,

on the role of technology,

let me emphasize that resource development,

whether it's capital accumulation, education,

human-capital building, development of natural resources,

is a long-run process.

It's not something that can be changed in short order.

Occasionally, there are disasters that destroy physical capital or human capital,

but most of the time,

building capacity in terms of resources takes time, and therefore,

that should be taken into account in any analysis

of the movement of the economy from the short run to the long run.

Any policy that helps resources to develop may have

long-run benefits but not necessarily short-run gains.

The other thing to emphasize is that fluctuations in resources

does not explain a whole lot of changes in year-to-year GDP fluctuations.

Now let's focus on the role of technology.

First, let me define technology.

Technology is the knowledge about the ways of combining resources to

produce goods and services that we need and satisfy our needs.

Better technology enables the economy to produce more output with the same resources,

and that's why we say that technology increases production capacity.

Very much like resource development,

technology also develops over the long period of time.

It's not something that can be changed very quickly.

The cell phone that you use, for example,

is the result of years, decades,

and even centuries of developments in scientific knowledge,

in innovation, and production technology.

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