MSc in International Management

«Global Scenarios: Module 2 (Macroeconomics)»

Lecture 1
Introduction
PRESENTATION

2
 The global environment of business
Firms operate in a dynamic
environment

Influence on firms?

Study the environment

and adapt accordingly

The Dynamic Business Environment (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)
The structure of the course

The economy in the long run

• Long-run economic growth
• Structural factors

Medium run: business cycles

and economic policies
• Expansions and recessions
• The role of monetary and fiscal
policies
 The GLO2 team -Instructors

Elisa Borghi - Part I

elisa.borghi@unibocconi.it
Office hours:
https://elisaborghi.as.me/schedule.php

Donato Masciandaro - Part II

donato.masciandaro@unibocconi.it
 The GLO2 team - Tutors

Claudio Brenna

Gong Zheng
 Activities

• Lectures
– Lecture notes &
readings
– Participation

7
 Exam

• Written exam (WE)

– 60 minutes
– 4 essay questions

OR …
• 2 partial exams (50% -- 50%)
– 30 minutes
– 2 essay question
THE LONG RUN: MOTIVATION

9
 Motivation: why the long run?

doesnt ,eean long run not relevant was a critics to economists

that were too focused on equilibrium in their models achievable in long
run

John Maynard Keynes

Tract on Monetary Reform. Page 80, 1923

“Economists set themselves too easy, too useless a task if in tempestuous seasons
they can only tell us that when the storm is long past the ocean is flat again”

10
 Motivation: why the long run?

long run decision help structure what is short ruen

short run we have today is result past long run choices

Warren Buffett

11
 Motivation: why the long run?

“You do not get to the long run

except through the short run, and
what happens in the short run has
a profound impact on the long run.
To reverse Keynes a bit, if you die
in the short run, there is no long
run.” Larry Summers
only obsessed getting profit in short term but if dont surrvive if dont focus long term
 Motivation: Why the long run?

Long-term thinking essential for success…

– “in 1985, in the face of fierce Japanese competition,
Intel decided to abandon its core business, memory
in which intel was leader
chips (DRAM), and focus on the then-emerging
business of microprocessors (CPU)”
• Intel emerged in a few years on top of a new multi-
billion-dollar industry
are u crazy giving up business in which u are leader

that decision was strange in 1985

Dominic Barton, “Capitalism for the Long Term”, Harvard Business Review, March 2011
13
 Motivation: Why the long run?

Long-term thinking essential for success…

– The iPod, released in 2001, sold just 400,000 units
in its first year, during which Apple’s share price fell
by roughly 25% if take s term view u say its a failure but we now now its not a failure

By late 2009 the company

had sold 220 million
iPods—and revolutionized
the music business

Dominic Barton, “Capitalism for the Long Term”, Harvard Business Review, March 2011 14
 Short-termism vs. long-term firms
compare firms that adopt long term strategy with firms have short term strategy (quartelry result)

Empirical evidence on long-term firms:

• exhibit stronger fundamentals they are more resilient
– Revenues grow more and are less volatile
– Higher earnings growth and lower decline during the crisis
they invest in period recession , they plan for future
– Higher profits
• deliver superior financial performance
• continue to invest in difficult times
• add more to economic output and growth
larger contribution to the economy in which they operate create more value for society

Long-term firms are defined accordingly to a five-factor Corporate Horizon index, based, among other factors, on consistency of
investment rates and quality of earnings
More info in: "Measuring the Economic Impact of Short-Termism", McKinsey Global Institute, Discussion paper, February 2017. 15
OVERVIEW OF PART 1

16
 change economy in whch we live

from 6 on impact specific shock altering structure

population growth
to revive productivity in developed countries ageing population (western c
even emerging countris like china b
becoming older
structure of thhe economy
The economic environment
in which firms operate
why do we observe growth over long run
Determinants of Long-Run Economic Growth(L2-L3) why some c rich some
poor

The Slowdown in Productivity (L4-L5)

product is one of determinants of lt growt
in developed countries we observed sllowdown productivity (us, europe)
- slowdown due firms less productvie on average
-composition of firms changes over time some able increase product
use artificial intelligence others lagging nehind

Globalization (L9-L10)
disruption GVC for geopolitical reasons shock
and pandemic
shock
LONG-RUN ECONOMIC GROWTH

18
 Long-run growth: focus on “potential” GDP
what happens to gdp over long run

we have HDI (human dev index) but one 3 pillar build iit is gdp
we use gdp bc difficult build another measure

measure of aggregate production(income) to compare welfare among countries, not precise measure welfare
not given amount good /service
produce

Actual GDP
Observed!
Cyclical component included

when gdp higher happiness higher,

gdp flcutuates over a trend

gdp fluctuates Potential GDP when use factor production , no idle machine
not obverusing them
bc we have crisis, highest level of output an economy can sustain over a period of time
recession, period expansion
this is business cycle (med run) “Full employment” GDP
caused shocks that !!! Not observed!!! doesnt exist its the trend
are transitory or policies meaure ability eco generating income depends how many factor production, how many worker,
capital, skill level, technol(ability combine factor production)
19
 Growth is quite a recent phenomenon…

we give eco growth for granted but its bery recent uk is the first country to
increase off the baseline beginning in 1800 and sharply increase in 1900 to reach highest gdo
japan increases in 1900 nearly aatching up uk
argentina begin increasing in late 1800
techno has potential to change how eco works (1st industrial revolution)
by inspecting graph eco growth 0 flat
huge heterogeneity among countries

Jones, C. I. (2013), Macroeconomics, (3rd edition), W. W. Norton & Company. 20

 Growth Over the Very Long Run

• Sustained increases in standards of living are a

recent phenomenon

• Economic growth emerges in different places at

different times
– Per capita GDP differs remarkably around the world
– Success stories vs. reversals
failures

21
 Log of GDP per capita (1820-2018)
examples success increase over time for whole period of US
closing gap with us China: growing ater compared to us, shows quite relevant growth gdp per capita
korea: huge icncrease closing gap with us over time (now is developed country)

Campante, F., Sturzenegger, F. and Velasco, A. 2021. Advanced Macroeconomics: An Easy Guide. Ch. 2. ‘Growth theory
preliminaries’, pp. 7–22. London: LSE Press. DOI: https://doi.org/10.31389/lsepress.ame.b License: CC-BY-NC 4.0
 Log of GDP per capita (1820-2018)
reversals: argentina, venezuela
success: botswana

arg was among the richest copuntries at end 19th century now its middle income contywith
problems of stability

Campante, F., Sturzenegger, F. and Velasco, A. 2021. Advanced Macroeconomics: An Easy Guide. Ch. 2. ‘Growth theory
preliminaries’, pp. 7–22. London: LSE Press. DOI: https://doi.org/10.31389/lsepress.ame.b License: CC-BY-NC 4.0
we cannot give or granted that countries rich now will be richest in future (history tells us things change argentina was
richest c now its no longer, uk was champion then after war us came out as super power after war

A new gravity center?

firms are contributin to gdp (who is making growth)

OECD (2016), OECD Science, Technology and Innovation Outlook 2016, OECD Publishing, Paris.
http://dx.doi.org/10.1787/sti_in_outlook-2016-en
24
 Introduction: long-run growth

• Why are there rich and poor countries?

• Why do some countries become richer and
others stay poor?
• Why countries differ in standards of living?
• Why is it relevant for firms?

Drivers of economic growth

1) ability of accumulating factors of production )canot generate more income if sont have workers , capital
2) productivity (ability using in most efficient way factors of production) linked to technology
Some useful concepts

DEFINITIONS AND MEASUREMENT

26
 Definition of Economic Growth
if divide gdp/ pop we have average value and this hides inequality but is still roughly
good measure

Focus on living standards

⇒ Per capita GDP and its growth rate
ability consumers to consume gdp/ population

• 𝑦 ≡ per−capita GDP
• 𝑔 ≡ growth rate of per-capita GDP small letters: per capita term
Y: gdp (capital Y)

𝒚𝒕 − 𝒚𝒕−𝟏 𝒚𝒕
𝒈≡ = −𝟏
𝒚𝒕−𝟏 𝒚𝒕−𝟏
• Alternatively:
approc same when we have small
growth rates
𝐥𝐧 𝒚𝒕 − 𝐥𝐧 𝒚𝒕−𝟏 = 𝐥𝐧 𝟏 + 𝒈 ≈ 𝒈
 Small differences make the difference!

• A less than 1% difference in

the annual growth rate may
over long run huge gap
seem small …

– Consider a 100-year period:

• Country A and B begin at
the same level of GDP
($100 billion)
• Country A grows at 1
percent each year
• Country B grows at 0.25
percent each year

28
Small differences in growth rates result in large
differences in standards of living
heterogeneity
strong geographical component

average growth rate over long run relevant growth rates and today 2014 as rich
botswana as US
africa ex of success

poor countries result of slow and neg gorwht

if = 1 have same gdp per cap of us

In 2014
Jones, C. I. (2013), Macroeconomics, (3rd edition), W. W. Norton & Company. 29
 Per capita GDP, US… growth rate?
how can we modify graph to get more info ...

its not true we have slow growth

and then faster hrowth
faster growth

can be misleading not easy understand

growth rate

slow growth

What can we say about the growth rate over

time by inspecting the graph?
Jones, C. I. (2013), Macroeconomics, (3rd edition), W. W. Norton & Company. 31
 Growth Rates
𝑔 ≡ Average period growth rate from time 0 to time 𝑡
𝑦0 ≡ Initial value of per-capita GDP
Discrete Compounding Continuous Compounding
year, month, day continuous flow of time but idea is same

𝑦𝑡 = 𝑦0 1 + 𝑔 𝑡 𝑦𝑡 = 𝑦0 𝑒 𝑔𝑡
In logs: In logs:
ln 𝑦𝑡 = ln 𝑦0 + 𝑡 ln 1 + 𝑔
𝐥𝐧 𝒚𝒕 = 𝐥𝐧 𝒚𝟎 + 𝒈𝒕
ln 𝑦𝑡 ≈ ln 𝑦0 + 𝑔𝑡
straight line if time horizontal axis (x)
vertical we put ln yt
slope = g

by inspecting graoh can say something about growth rate works even with continuous compouding same thing
 The Ratio Scale or Log Scale

• better intuition using the ratio scale

– Equally spaced tick marks on the vertical axis are
labeled consecutively with numbers that exhibit a
constant ratio
• When plotted on a ratio scale, a variable that
grows at a constant rate will be a straight line

33
 Ratio Scale or log scale

equally spaced value same amout n(10 ) every tick: same proportion (not same quantity)
12/6= 2, 24/12=2 as if we take log of variable

here evident grows at constant rate

not evident here growing at constant rate

Jones, C. I. (2013), Macroeconomics, (3rd edition), W. W. Norton & Company. 34

 Ratio Scale
equivalent to taking log of variable

represnet same quantity

we cannot extract info about growth rate equally spaced vert tickmark represnt same proportion

sae proportion

in 1929 we deviate from line (great

depression)

misleding graoh 1 : eco grow slowlym then haave huge rgwoth but not true all over period us eco grew 2% per year
Per capita GDP in the United States has grown at approximately 2
percent per year over the last 130 years

If growth rates are rising, the slope increases g (line become steeper)

Jones, C. I. (2013), Macroeconomics, (3rd edition), W. W. Norton & Company. 35

 Real GDP per capita (US$ 2011) – ITALY
(NORMAL scale)
41000 GDP per capita
Italy, US$ 2011
36000 (normal scale)
31000

26000

21000

16000

11000

6000

1000
1874
1880
1886

2012
1850
1856
1862
1868

1892
1898
1904
1910
1916
1922
1928
1934
1940
1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
2006
36
 Real GDP per capita (US$ 2011) – ITALY
(ratio scale)
log scale

100000 GDP per capita

Italy, US$ 2011
(ratio scale)

10000 we cannot easily approximate with a line

1000
1856

1886

1952
1850

1862
1868
1874
1880

1892
1898
1904
1910
1916
1922
1928
1934
1940
1946

1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
37
 Real GDP per capita (US$ 2011) – ITALY
(ratio scale)
reversals: argentina, venezuela
succeress: botswana

100000 GDP per capita

Italy, US$ 2011
(ratio scale)
we give eco grorewrite prwth for granted but its bery recent uk is the first country to
increase off the baseline beginning in 1800 and sharply increase in 1900 to reach highest gdo
japan increases
if weinapproximate
1900 nearly with
aatching up1.8&
line g= uk almost 2 percent
argentina begin increasing in late 1800
but approximation
techno has potential to change how eco works (1st industrial revolution) not as good as us case
by inspecting graph eco growth 0 flat g ≈ 1.8%
10000 huge heterogeneity among countries

1000
1856

1886

1952
1850

1862
1868
1874
1880

1892
1898
1904
1910
1916
1922
1928
1934
1940
1946

1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
38
 Real GDP per capita (US$ 2011) – ITALY
(ratio scale)
100000 GDP per capita
Italy, US$ 2011
(ratio scale)

g ≈ 1.8%
10000
g ≈ 2.9%
g ≈ 0.7% after wars
approximation is better for 1st period
but for second part not ery good approxim
ita was agricultural countru
low level of industrialization
that decision was strange in 1985 re

1000
1856

1886

1952
1850

1862
1868
1874
1880

1892
1898
1904
1910
1916
1922
1928
1934
1940
1946

1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
39
 Real GDP per capita (US$ 2011) – ITALY
(ratio scale)
100000 GDP per capita
Italy, US$ 2011
(ratio scale)
g ≈ 1.3%

g ≈ 1.8%
10000
g ≈ 6% g ≈ 2.9%
g ≈ 0.7%
60-70 extraord growth then slowdown eco
growth driven by slow down productivity growth

1000
1856

1886

1952
1850

1862
1868
1874
1880

1892
1898
1904
1910
1916
1922
1928
1934
1940
1946

1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
40
 Properties of growth rates
growth rate of ratio is diff of growth rates hen g not too big

𝑥
• 𝑖𝑓 𝑧 = ⇒ 𝑔𝑧 ≈ 𝑔𝑥 − 𝑔𝑦
𝑦
• 𝑖𝑓 𝑧 = 𝑥𝑦 ⇒ 𝑔𝑧 ≈ 𝑔𝑥 + 𝑔𝑦
• 𝑖𝑓 𝑧 = 𝑥 𝛼 ⇒ 𝑔𝑧 ≈ 𝛼 𝑔𝑥

𝐺𝐷𝑃 in levels
• Example: 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 =
𝑃𝑜𝑝
– In growth rates: 𝑔𝑦 = 𝑔𝑌 − 𝑔𝑃𝑜𝑝

41
 perfect model is world (but brain is limited
sp we build fictituios world thst is true only within boundaries (assumptions)

result model is not true have to compare wst model tels u and what real world rells u
then ahve discuss assumptions not very realistic ,

not all contries grow same growth rate

DETERMINANTS OF ECONOMIC
GROWTH: A SIMPLE MODEL

42
 Production function

• Why a model?

• Assumptions:
– Single, closed economy
– One good, Two inputs: Labor (𝐿) & Capital (𝐾)

• Production function:
– Amount of output (Y) produced given any number
sarebbe gdp sommi per tutte firms
of inputs
 Production Function

factor production capital

abiloty combining factor producto
gives us our priductivity
what we can get from our resources
 Production Function: properties

• Assume a Cobb-Douglas production function:

– 𝒀 = 𝑭 𝑲, 𝑳 = 𝑨𝑲𝜶 𝑳𝟏 −𝜶
• 𝛼 empirically = 1/3
• 𝐴 = Total Factor Productivity

• F(K,L) is increasing in both K and L

– More inputs yield more output

• Constant returns to scale

– doubling all inputs exactly doubles output
 Growth Accounting
2 1
Assume: 𝑌 = 𝐴𝐿 𝐾
y in levels GDP
3 3
perche Y maiuscolo ,
we can do same in gdp per capita

• Output growth corresponds to changes in 𝑌

• 𝑌 can change for three reasons:
1. Capital stock (K) changes
if use more inputs
2. Labor force (L) changes
3. Ability to produce goods with given resources (K,
L) changes
• Technological advances (changes in A) improve productivity knowledge on ho
combine them
 Growth Accounting

1 2
𝑔𝑌 = 𝑔𝐴 + 𝑔𝐾 + 𝑔𝐿
3 3
gdp growth in level dipende da growth kap , ...

• Growth Accounting:
– Decomposes growth rates of GDP into its
determinants

47
korea large share in groth is rep
by growth in product (not groeing bc increasing accumulationg producto nfactors)

Growth accounting
decompose growth rate gdp some countries in

Growth Accounting 2000-2007

6.00
BLACK DOT average growth rate of gdp in period
KOREA of 8 years
5.00 ITALY before great recession 5.04
UK
G
4.00 heterogeneity
why growth rate so low in germany
productivity is imp
in UK , us imp driver of why so big for south korea
3.00 eco growth more imp than
accumulation factors 2.61
2.48
2.00 very low contribution decline in productivity
1.88 we grew despite fact negativ productivity
labor force germaby no
purple section1.32 we grew bc we had sccumulaton of factors
1.00 1.11

0.00
United States United Kingdom Germany France Italy Korea
-1.00
blue= capital contribution given by accumulation of capital, labor
Hours worked Productive capital stock Capital quality Multifactor productivity GDP growth, 2000-2007
LABOR K CAPITAL
A techno
https://www.oecd-ilibrary.org/sites/f25cdb25-en/1/3/2/index.html?itemId=/content/publication/f25cdb25-
en&_ga=2.170310304.1032747907.1635328012-
170235285.1626793023&_csp_=f3624e8b770eac8d5dc12a37d86e806e&itemIGO=oecd&itemContentType=issue#section-d1e819
 Key concepts

• Long-run vs. Short-run

• Potential GDP vs. Actual GDP
• Graphs with ratio scale
• Production function
• Growth accounting