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Macroeconomics Canada in The Global Environment 10th Edition Parkin Solutions Manual Full Chapter PDF
Macroeconomics Canada in The Global Environment 10th Edition Parkin Solutions Manual Full Chapter PDF
Macroeconomics Canada in The Global Environment 10th Edition Parkin Solutions Manual Full Chapter PDF
W he re w e a re go ing
Chapter 6 is the first of four chapters that examine the economy in the long run when the economy
is at full employment, that is, that examine trends in the economy. The following chapters focus on
finance and investment, money and the price level, and the exchange rate and balance of payments.
After these chapters the next section examines macroeconomic fluctuations by developing the AS-
AD model. The material presented in Chapter 6 is not used directly in the following chapters.
Nevertheless, as background material, Chapter 6 (and Chapter 7) is useful, particularly in Chapter
13 when the supply-side effects of fiscal policy are covered.
Lecture Notes
Economic Growth
You can start your discussion of this chapter by listing on the board, or on an overhead, various countries ranked
from highest per capita real GDP to lowest. It is a real eye opener for students to consider income per person
because it really shows how fortunate we are in Canada. Tell your students that in the 1960s countries like Hong
Kong, Singapore, and Japan used to rank around where China ranks today. Explain that this extraordinary growth is
part of what motivated economists over the last 20-30 years to try to deduce how this type of growth can occur. Is it
possible Canada could do something differently to grow at those growth rates? Is the neoclassical model correct in
its prediction that there will be a global equilibrium in which all nations have the same real GDP per person? Then
leave your students with the fact that China is 200 times the population of Hong Kong and 40 times the population
of Canada. This brings the obvious question: Should we be concerned?
• Economic growth leads to large changes in standards of living from one generation to the next.
• Economic growth rates vary across countries and across time.
• There are different economic theories to explain these variations in growth rates.
I. The Basics of Economic Growth
• The economic growth rate is the annual percentage change of real GDP. This growth rate is equal to:
Real GDP in current year − Real GDP in past year
Real GDP growth rate = × 100
Real GDP in past year
• The standard of living depends on real GDP per person, which is real GDP divided by the population. The
growth rate of real GDP per person can be calculated using the formula above, though substituting real
GDP per person.
• The growth rate of real GDP per person also approximately equals the growth rate of real GDP minus the
population growth rate.
Real GDP can increase for two distinct reasons: The economy might be returning to full employment in an
expansion phase of the business cycle or potential GDP might be increasing.
• The movement from point A to point B reflects an
expansion phase of the business cycle. It occurs with
no change in production possibilities. Such an
expansion is not economic growth.
• The increase in aggregate production reflected by the
movement from point B on PPF0 to point C on PPF1
is economic growth—it reflects an expansion of
production possibilities shown by an outward shift of
the PPF.
The Rule of 70 is useful for determining how long it will
take for a variable to double. The Rule of 70 states that the
number of years it takes for the level of any variable to
double is approximately 70 divided by the annual
percentage growth rate of the variable.
Run through an example of the rule of 70 that does not relate to economic growth. Examples: If tuition rates rise
at 6 percent per year, how long will it take it to double? 70/6 = 11.67 years. If you invest $10,000 at 12 percent
interest, how long will it take to double your money? 70/12 = 5.83 years.
Compound Interest: You can reinforce the importance of economic growth by relating the fact that if real GDP
per person had grown just 0.25 percentage points faster between 1960 and the present, every household today, on
average, would have almost $12,000 more income (every person would have $4,500 more). If real GDP per person
had grown 1 percentage point faster between 1960 and the present, every household today, on average, would have
$50,000 more income (every person would have $21,200 more).To make concrete just how much better off we
would have been, get the students to list what they would buy with an extra $21,200 a year.
Run through an example of the rule of 70 that does not relate to economic growth. Examples: If tuition rates rise at 6
percent per year, how long will it take it to double? 70/6 = 11.67 years. If you invest $10,000 at 12 percent interest,
how long will it take to double your money? 70/12 = 5.83 years.
Compound Interest You can reinforce the importance of economic growth by relating the fact that if real GDP per
person had grown just 0.25 percentage points faster between 1960 and the present, every household today, on
average, would have almost $12,000 more income (every person would have $4,500 more). If real GDP per person
had grown 1 percentage point faster between 1960 and the present, every household today, on average, would have
$50,000 more income (every person would have $21,200 more). To make concrete just how much better off we
would have been, get the students to list what they would buy with an extra $21,200 a year.
Is there convergence or divergence in standards of living? What is the role of economic growth for economic
inequality? These are highly controversial questions. Most anti-globalization activists treat it as incontrovertible that
economic growth creates higher inequality. But this view is likely incorrect. First, there has been a general
convergence of standards of living over the past 50 years. This fact is in part the result of economic growth in China
with a population that accounts for close to one-fifth of humanity. Second, while some nations have fallen behind,
those less developed countries that have grown fastest are those that have been most involved in “globalization” by
becoming more integrated into global markets for goods and capital. The policy suggestions of the anti-globalization
movement, such as reducing foreign trade and international capital mobility or even abandoning capitalism, property
rights, and markets are the policies that are currently most practised in countries that have grown the slowest. This
result might not be a coincidence.
The Causes of Economic Growth: A First Look: The limits of economics. The major obstacles to growth are
political, and economists don’t know much about how to remove those political obstacles. You can give your
students a glimpse of these obstacles in their worst form by reminding them of news video clips they’ve almost
certainly seen of Kabul, Mogadishu, and other troubled cities in which the rule of law has completely broken down.
Economists know a lot about how to make an economy grow if the preconditions are in place, but virtually nothing
about how to bring those preconditions about.
The preconditions. The three preconditions for growth—markets, property rights, and monetary exchange—
are all essential to create acceptable levels of risk and low enough transaction costs to justify investment,
specialization, and exchange. If you want to spend time on it, you can generate an interesting discussion on whether
what matters is the particular system of property rights, or just that they be clear, certain, and enforceable with
reasonable cost—the concept of the rule of law. Most students have never realized that property rights are highly
varied, and many fast-growing economies have nothing like U.S. absolute property rights in land, for example.
Interactions of sources of growth. Most students can see immediately how investment in physical and human
capital in the form of education and training contribute to growth. Some have more difficulty getting a clear view of
the role of learning by doing and technical change, particularly the small continuous refinement and improvement to
existing technology rather than the spectacular breakthroughs. Much growth probably comes from the interaction of
the last two, and this source of growth can be illustrated with a discussion of why firms offer incentives to workers
to suggest improvements to working methods and procedures.
Why the Luddites were wrong. This chapter provides you with a wonderful opportunity to explain to your students
why the Luddites were wrong—and why the modern neo-Luddite movement is wrong. You can learn more than you
need to know about Luddism and the Luddites, ancient and modern, at
http://carbon.cudenver.edu/~mryder/itc_data/luddite.html
The Classical Model. Explain that more capital and more productive capital that uses new technologies increases
productivity, shifts the production function upward, and shifts the demand for labour curve rightward. Real GDP
increases and on the average, the real wage rate rises.
You might then spend a few minutes agreeing that capital accumulation and technological change decrease the
demand for the labour that the new capital replaces. But it increases the demand for other types of labour—
complementary labour. People must acquire more skill—some people learn to work with the new capital, some learn
how to maintain it in good condition, some learn how to build it, some learn how to market and sell it, some learn to
design new ways of using it, some work on thinking up new goods and services to produce with it, and so on. All of
these people are more productive that they were before.
New technologies that create new products have even more obvious effects on productivity. The development
of the CD in the early 1980s is a good example. Suddenly thousands of people became very productive converting
the heritage of recorded music into digital format, cleaning up the sound, and making and selling millions of CDs.
The same type of thing is now happening with the DVD and Blu-ray.
The chapter concludes with an Economics in the News analysis of economic growth in North America and explains
why Canada’s economic growth rate is triple the U.S. growth rate. Details on the use of technology and its impact
on productivity and growth show a nice short-term and long-term analysis of recent data for both countries.