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?

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?

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
 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
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

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%

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

Empirical evidence on long-term firms:

• exhibit stronger fundamentals
– Revenues grow more and are less volatile
– Higher earnings growth and lower decline during the crisis
– Higher profits
• deliver superior financial performance
• continue to invest in difficult times
• add more to economic output and growth

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
 The economic environment
in which firms operate
Determinants of Long-Run Economic Growth(L2-L3)
The Slowdown in Productivity (L4-L5)

Globalization (L9-L10)
LONG-RUN ECONOMIC GROWTH

18
Long-run growth: focus on “potential” GDP

Actual GDP
Observed!
Cyclical component included

Potential GDP
highest level of output an economy can sustain over a period of time
“Full employment” GDP
!!! Not observed!!!

19
 Growth is quite a recent phenomenon…

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

21
 Log of GDP per capita (1820-2018)

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)

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
 A new gravity center?

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

Some useful concepts

DEFINITIONS AND MEASUREMENT

26
 Definition of Economic Growth

Focus on living standards

⇒ Per capita GDP and its growth rate

• 𝑦 ≡ per−capita GDP
• 𝑔 ≡ growth rate of per-capita GDP

𝒚𝒕 − 𝒚𝒕−𝟏 𝒚𝒕
𝒈≡ = −𝟏
𝒚𝒕−𝟏 𝒚𝒕−𝟏
• Alternatively:

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
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

In 2014
Jones, C. I. (2013), Macroeconomics, (3rd edition), W. W. Norton & Company. 29
 Per capita GDP, US… growth rate?

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

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
 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

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

 Ratio Scale

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

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
 10000

1000
1850
1856
1862
1868
1874 (ratio scale)
Italy, US$ 2011
100000 GDP per capita

1880
1886
1892
1898
1904
1910
1916
1922
1928
1934
1940
(ratio scale)

1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
Real GDP per capita (US$ 2011) – ITALY

2006
2012
37
 Real GDP per capita (US$ 2011) – ITALY
(ratio scale)
100000 GDP per capita
Italy, US$ 2011
(ratio scale)

g ≈ 1.8%
10000

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%

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%

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

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

41
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
of inputs
Production Function
 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 3 3

• Output growth corresponds to changes in 𝑌

• 𝑌 can change for three reasons:
1. Capital stock (K) changes
2. Labor force (L) changes
3. Ability to produce goods with given resources (K,
L) changes
• Technological advances (changes in A)
 Growth Accounting

1 2
𝑔𝑌 = 𝑔𝐴 + 𝑔𝐾 + 𝑔𝐿
3 3

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

47
 Growth accounting
Growth Accounting 2000-2007
6.00

5.00 5.04

4.00

3.00

2.48 2.61
2.00
1.88
1.32
1.00 1.11

0.00
United States United Kingdom Germany France Italy Korea
-1.00

Hours worked Productive capital stock Capital quality Multifactor productivity GDP growth, 2000-2007

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