WEBVTT

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so after doing aslm in the first part of

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the course and where we took prices

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completely sticky and output was fully

00:00:25.160 --> 00:00:30.960
determined by aggregate demand uh we

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said well that minates in the very very

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short run but but over time at some

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point the supply side start showing up

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there are constraints the labor market

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gets very tight and so on and and so we

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added a block that started from wage

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determination and then we look at the

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impact of wages on

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prices and then we related inflation

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rate use that to relate inflation rate

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to economic activity so output above or

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below the potential output or or the

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natural level of output and things of

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that kind so remember the starting point

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was a um a wage

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demand equations so what what workers

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demand for a wage this period depends on

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how what's the price level they expect

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for the period because they set the wage

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today and they have to leave through the

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year or to whatever is the Contracting

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period H with that nominal wage so

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naturally if if they expect higher price

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level in the future they're going to

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demand the higher nominal wage today and

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then we said that's a funion that is

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also going to be decreasing in the level

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of unemployment because the obviously

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that weakens bargaining for power for

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workers or makes makes actually becoming

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unemployed or not having a job H more

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costly because it's very difficult to

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exit out of unemployment and then we

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made us an normalization this function

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also an increasing function on this

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variable Z which captures a bunch of

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Labor Market institutions including wage

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labor bargaining power so more

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bargaining power means that for any

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given level of unemployment workers

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would tend to demand a higher wage okay

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so that's what the Z variable was all

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about then we wanted to go from wages to

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prices H because the ultimate goal was

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to bring inflation into the picture and

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and for that we have to produce a we we

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introduce a production function H

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because uh in particular out we made

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output a function of employment and and

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that very naturally will connect wage

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pressure to price pressure because you

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know you need labor to produce output so

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the labor market is very tight that

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means also it's going to be more

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expensive to produce output and we

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simplifi this production function a lot

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we made it output equal to employment

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and that meant also that one unit of

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Labor in order to produce one extra unit

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of output you need one extra unit of

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label which means you need to pay a wage

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okay one one one unit of the wage and so

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then we said suppose that the price

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setting from the side of the firms

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simply takes this cost which is the wage

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and adds a markup to it to pay for a

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bunch of other things that we haven't

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introduced in this model okay so the

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price charged by firms is equal to the

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wage times one plus some positive

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numbers 8.2 or something like that so

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1.2 H and we can write rewrite this

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price setting equation as a wage the

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real wage the firms are willing to offer

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and it's just equal to that okay so when

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the markup goes up that means the real

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wage the firms are willing to offer is

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lower than

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otherwise okay that took us to the

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concept of the natural rate of

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unemployment and and and what the

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natural what I said no is there's

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nothing natural about the natural rate

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of unemployment it's simply a definition

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that says that's an employment that

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results when the price expected price is

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equal to the actual price that's that's

00:04:04.199 --> 00:04:09.639
what that's all that that is and if when

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when we have that condition then we can

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think of the real wage demanded by work

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because I can replace expected price for

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actual price and divide both sides by

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price so the actual wage demanded by

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workers is equal to a function of the

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natural rate of unemployment and I stick

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the end there precisely because I

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replace expected price or P for no other

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reason okay but now we have two

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equations for the real wage the real

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wage that firms are willing to pay and

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the real weight of workers need to

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demand and we can make them both equal

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and that determines the natural rate of

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unemployment okay so remember this from

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the point of view of the firm this is

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equal to one over one plus a marup the

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only endogenous variable the marup is a

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constant the Z is also a parameter is

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exogenous and so from the here we can

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solve the natural rate of unemployment 1

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over 1 plus M and we can solve the

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natural rate of unemployment and if you

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do the algebra right you you're going to

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get to a point like that that pins down

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natural rate of unemployment again there

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is nothing natural about the natural

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rate of unemployment it depends on a

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bunch of parameters okay which for

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example it clearly depends on the markup

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it depends on things that we took as

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constant here as given here all the

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things that wear in Z those are part of

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that and so we then we look at things

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that change and that's just done with

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equations we look at things that change

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the natural rate of unemployment that's

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one example if bargaining Power by

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workers goes up they're going to demand

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a higher wage at the initial natural

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rate of unemployment well that obviously

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that higher wage is inconsistent with

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what firms are willing to pay the only

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way equilibrium can be restor in this

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model that's the medium run equilibrium

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is for the natural rate of unemployment

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to rise to un Prime okay

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so there you have it nothing natural the

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natural rate of employ is not constant

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it depends on institutional parameters

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such as bargaining power another example

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is markups it depends on markups as well

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the degree of competition if you will in

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the Goods Market if if we are in some

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equilibrium like this one and now

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suddenly firms for whatever

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reason choose or need to charge a higher

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markup that h means that that at this

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level of unemploy the wage that workers

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would demand is higher than the wage

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that firms are willing to pay the real

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wage and the only thing that can clear

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the market in this case here in the

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medium run is for the natural rate of

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unemployment to rise okay so here we got

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two experiments where we move some

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parameter one the bargaining power of

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workers and the other one the the markup

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of the firms and both increase the

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natural rate of unemployment

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good The Next Step was

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to look at things that happen outside

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the natural rate of unemployment and

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particular what happens to prices there

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okay we look so what we did is we took

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the we went back to the

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model with the expected price here that

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means an employment that comes out from

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this equilibrium is not is not going to

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be necessarily the natural rate of an

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employment that will be the case only if

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P happens to be equal to p h then we

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simplify this function f here for

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something linear like this very simple

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but again decreasing in unemployment

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increasing in this institutional

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parameters

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z h we replace this wage here from this

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expression here and rearrange so we got

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this

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here okay and the next step was just to

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go from here to rate of inflation and we

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did it through a SE several steps and

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approximations and we ended up with what

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is known as the Philips curve okay so

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this say inflation is increasing an

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expected inflation on these

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institutional parameters if the markups

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go up that will tend to

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increase inflation H if bargaining Power

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by workers go up then that's the same

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but most importantly is negatively

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related to unemployment and that's the

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reason that today nowadays you know

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there's lots of discussion about the

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tightness in the labor market and and

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whether that's really necessary do we

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need to cause a recession a situation

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where an employment goes up a lot in

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order to really finally bring down

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inflation yeah that's was

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question is

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alha oh remember that I made up this

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function we said this function is

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decreasing

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unemployment I just

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uh replace that function for that

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okay so it's a sensitivity of wage

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Demand by workers to their employment

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rate Alpha that is very high means that

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wage demand is very sensitive very

00:09:02.120 --> 00:09:07.600
responsive to unemployment y intuition

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for like an expected price like could

00:09:07.600 --> 00:09:10.440
you connect that back to like I don't

00:09:08.799 --> 00:09:12.559
know some sort of like a commodity or

00:09:10.440 --> 00:09:15.680
something or so what is the intuition

00:09:12.559 --> 00:09:18.039
for for this yeah like just like a price

00:09:15.679 --> 00:09:21.639
feels tactile but like an expected price

00:09:18.039 --> 00:09:24.039
I don't well I mean imagine that workers

00:09:21.639 --> 00:09:26.799
and firms bargain for a wage that will

00:09:24.039 --> 00:09:28.599
live through the year you're buying by

00:09:26.799 --> 00:09:30.519
you're bargaining for the wage nominal

00:09:28.600 --> 00:09:34.360
wage today you don't set a real wage you

00:09:30.519 --> 00:09:36.519
set the nominal wage say $100 whatever

00:09:34.360 --> 00:09:38.480
well the wage demand will depend a lot

00:09:36.519 --> 00:09:41.159
on on what I expect inflation to be

00:09:38.480 --> 00:09:43.480
during this period if I expect inflation

00:09:41.159 --> 00:09:44.919
to be 10% you're very likely to demand a

00:09:43.480 --> 00:09:46.879
higher nominal wage because you have to

00:09:44.919 --> 00:09:48.360
leave an average with higher prices so

00:09:46.879 --> 00:09:51.078
that's that's the role of that is the

00:09:48.360 --> 00:09:53.680
price I mean I I would prefer and there

00:09:51.078 --> 00:09:55.639
are countries where that's done to set

00:09:53.679 --> 00:09:57.759
my wage in real terms so I don't need to

00:09:55.639 --> 00:09:59.480
worry about that but in practice you in

00:09:57.759 --> 00:10:01.278
economies with low inflation like the US

00:09:59.480 --> 00:10:03.639
you don't do that you you get a nominal

00:10:01.278 --> 00:10:05.799
wage and you have to leave for a year or

00:10:03.639 --> 00:10:10.720
until the next negotiation for your wage

00:10:05.799 --> 00:10:10.719
contract with that level of of wages

00:10:10.919 --> 00:10:17.319
okay with the interest rate or with the

00:10:14.039 --> 00:10:19.240
the inflation rate whereas the I guess

00:10:17.320 --> 00:10:21.519
the regular price is defined by the wage

00:10:19.240 --> 00:10:23.839
is depend on the market no no they're

00:10:21.519 --> 00:10:24.839
both the same but one is the only thing

00:10:23.839 --> 00:10:28.320
is

00:10:24.839 --> 00:10:29.800
that this price here is not sort of the

00:10:28.320 --> 00:10:32.040
current is what you really expect the

00:10:29.799 --> 00:10:33.759
price to be during the year is that is

00:10:32.039 --> 00:10:36.199
this is here just because at the moment

00:10:33.759 --> 00:10:37.879
in which you set the wage you don't know

00:10:36.200 --> 00:10:41.040
the price you're going to face as a as a

00:10:37.879 --> 00:10:42.120
worker but it's it's the price so you

00:10:41.039 --> 00:10:44.519
don't know the price that you're going

00:10:42.120 --> 00:10:46.720
to actually face so the only the best

00:10:44.519 --> 00:10:49.360
you can do is calculate well I think

00:10:46.720 --> 00:10:50.959
inflation is going to be 10% so give me

00:10:49.360 --> 00:10:53.519
know what I would have had in mind with

00:10:50.958 --> 00:10:55.039
inflation equal to zero plus 5% so on

00:10:53.519 --> 00:10:56.078
average I'm about right that's sort of

00:10:55.039 --> 00:10:58.679
the

00:10:56.078 --> 00:11:01.000
logic but this expected price is meant

00:10:58.679 --> 00:11:02.319
to be your best proxy you have at the

00:11:01.000 --> 00:11:04.519
moment in which you're bargaining for

00:11:02.320 --> 00:11:07.560
your wage for what the actual price will

00:11:04.519 --> 00:11:10.399
be during the life of that particular

00:11:07.559 --> 00:11:10.399
wage

00:11:10.958 --> 00:11:13.958
okay

00:11:15.759 --> 00:11:22.399
um okay so we end up with that that that

00:11:19.240 --> 00:11:24.519
uh Philips curve here importantly this

00:11:22.399 --> 00:11:27.399
an decreasing function of

00:11:24.519 --> 00:11:29.879
unemployment er um and then we' made

00:11:27.399 --> 00:11:31.679
different assumptions about expectations

00:11:29.879 --> 00:11:33.360
if expected inflation for example is a

00:11:31.679 --> 00:11:36.479
constant that's when we say expected

00:11:33.360 --> 00:11:38.680
infl inflation is very well anchored

00:11:36.480 --> 00:11:41.159
then you get a Philips curve that looks

00:11:38.679 --> 00:11:42.919
like this in which inflation it has a

00:11:41.159 --> 00:11:45.120
constant here and it's decreasing on the

00:11:42.919 --> 00:11:47.719
rate of unemployment and and during the

00:11:45.120 --> 00:11:50.278
60s H that that relationship sort of

00:11:47.720 --> 00:11:52.399
held fairly well it was a downward slope

00:11:50.278 --> 00:11:54.639
in relationship it got to be steeper and

00:11:52.399 --> 00:11:56.360
steeper as we moved into higher and

00:11:54.639 --> 00:11:58.440
higher inflation levels and then I said

00:11:56.360 --> 00:12:01.240
but in the 70s the whole thing broke

00:11:58.440 --> 00:12:03.680
loose you nothing like a downward

00:12:01.240 --> 00:12:05.240
sloping curve here that happened for two

00:12:03.679 --> 00:12:06.759
reasons there were some cause push

00:12:05.240 --> 00:12:10.440
shocks you can think of lots of shocks

00:12:06.759 --> 00:12:12.639
to M but more interesting H expected

00:12:10.440 --> 00:12:15.399
inflation became an anchor and then we

00:12:12.639 --> 00:12:17.198
changed then H the expected inflation

00:12:15.399 --> 00:12:18.879
mod for rather than being a constant

00:12:17.198 --> 00:12:22.399
being the some weighted average like

00:12:18.879 --> 00:12:24.919
this and we said look during the

00:12:22.399 --> 00:12:28.278
70s essentially that that Theta was

00:12:24.919 --> 00:12:30.120
equal to one okay so inflation expected

00:12:28.278 --> 00:12:32.000
inflation was really whatever was

00:12:30.120 --> 00:12:34.519
inflation last year people expected that

00:12:32.000 --> 00:12:36.000
level of inflation to stay the next year

00:12:34.519 --> 00:12:38.959
rather than going back to that whatever

00:12:36.000 --> 00:12:42.000
was the constant or inflation Target or

00:12:38.958 --> 00:12:43.958
historical constant pi and and that

00:12:42.000 --> 00:12:45.360
meant that the the during that period

00:12:43.958 --> 00:12:47.919
really the Philips curve looked more

00:12:45.360 --> 00:12:50.199
like a relationship of the change in the

00:12:47.919 --> 00:12:52.519
inflation rate as a decrease in function

00:12:50.198 --> 00:12:54.039
of unemployment so that means that when

00:12:52.519 --> 00:12:56.240
you increase an employment here you

00:12:54.039 --> 00:12:58.958
reduce a rate at which unemployment is

00:12:56.240 --> 00:12:59.839
inflation is rising okay that's the goal

00:12:58.958 --> 00:13:02.559
of

00:12:59.839 --> 00:13:06.000
the situation in in a case in

00:13:02.559 --> 00:13:08.198
which expected inflation is an an anchor

00:13:06.000 --> 00:13:10.399
and the last step we had there is we

00:13:08.198 --> 00:13:12.120
replace we notice we said well what

00:13:10.399 --> 00:13:14.600
happens if we stick in here the natural

00:13:12.120 --> 00:13:16.600
rate of unemployment then that will give

00:13:14.600 --> 00:13:18.278
us that will happen only when expected

00:13:16.600 --> 00:13:20.240
price is equal to actual prices so that

00:13:18.278 --> 00:13:22.399
means that when inflation is equal to

00:13:20.240 --> 00:13:24.079
expected inflation from here we can

00:13:22.399 --> 00:13:26.240
solve the natural rate of unemployment

00:13:24.078 --> 00:13:28.679
as a function of these structural

00:13:26.240 --> 00:13:30.959
parameters and once we have that we

00:13:28.679 --> 00:13:34.159
could go back to our Philips curve and

00:13:30.958 --> 00:13:36.078
rewrite it in this way okay so you can

00:13:34.159 --> 00:13:37.480
think of the Philips curve in this way

00:13:36.078 --> 00:13:39.879
and this is the the the way you

00:13:37.480 --> 00:13:43.159
typically we typically write it down in

00:13:39.879 --> 00:13:45.519
which it says H inflation is decreasing

00:13:43.159 --> 00:13:47.958
in the unemployment

00:13:45.519 --> 00:13:50.600
Gap

00:13:47.958 --> 00:13:52.159
so so if the unemployment is above the

00:13:50.600 --> 00:13:54.079
natural rate of unemployment that means

00:13:52.159 --> 00:13:56.559
inflation will tend to be below expected

00:13:54.078 --> 00:13:59.719
inflation if expected inflation happen

00:13:56.559 --> 00:14:01.239
to be equal to lag inflation that means

00:13:59.720 --> 00:14:02.839
if an employment is above the natural

00:14:01.240 --> 00:14:05.879
rate of unemployment then inflation will

00:14:02.839 --> 00:14:08.480
be falling

00:14:05.879 --> 00:14:11.320
okay any questions good you need to know

00:14:08.480 --> 00:14:11.320
this

00:14:11.440 --> 00:14:16.040
okay how to derive these things I mean

00:14:14.159 --> 00:14:18.198
not so much yeah you should know how to

00:14:16.039 --> 00:14:19.519
WR but you need to understand this

00:14:18.198 --> 00:14:22.519
relationship between the out the

00:14:19.519 --> 00:14:22.519
unemployment Gap and

00:14:23.360 --> 00:14:29.159
inflation relative to spected

00:14:26.120 --> 00:14:33.039
inflation yep

00:14:29.159 --> 00:14:35.919
unor versus de unored inflation expected

00:14:33.039 --> 00:14:40.838
inflation it's just a statement

00:14:35.919 --> 00:14:42.559
about ER what is the model we have H for

00:14:40.839 --> 00:14:44.360
expected

00:14:42.559 --> 00:14:47.518
inflation

00:14:44.360 --> 00:14:51.000
so suppose we have the following model

00:14:47.519 --> 00:14:53.519
for expected inflation one minus Theta

00:14:51.000 --> 00:14:56.198
Theta some number between Z and one

00:14:53.519 --> 00:14:58.480
times a constant

00:14:56.198 --> 00:15:01.240
inflation plus something that is a

00:14:58.480 --> 00:15:02.480
function of plus Thea times whatever is

00:15:01.240 --> 00:15:04.879
previous

00:15:02.480 --> 00:15:06.600
inflation central banks try to set a

00:15:04.879 --> 00:15:10.120
target for the inflation rate in the US

00:15:06.600 --> 00:15:12.480
is around 2% and ideally people will

00:15:10.120 --> 00:15:16.799
tend to believe they may see an tempor

00:15:12.480 --> 00:15:19.560
inflation that that is above say 2% but

00:15:16.799 --> 00:15:22.240
as long as as as people expect that to

00:15:19.559 --> 00:15:24.638
be undone in the in the in the next

00:15:22.240 --> 00:15:26.839
period then inflations we say they're

00:15:24.639 --> 00:15:28.639
very well anchored so that's a case in

00:15:26.839 --> 00:15:30.959
which very well anchored means th equal

00:15:28.639 --> 00:15:33.680
to Z here and you always sticking there

00:15:30.958 --> 00:15:35.919
in the case of the US at 2% and and

00:15:33.679 --> 00:15:37.519
there's a lot of there's a lot of that's

00:15:35.919 --> 00:15:39.719
the way the econom is behaving right now

00:15:37.519 --> 00:15:41.600
inflation today is 5% but if you ask

00:15:39.720 --> 00:15:43.920
people what do you expect inflation to

00:15:41.600 --> 00:15:45.720
be two and two years from now people

00:15:43.919 --> 00:15:49.120
tell you me look around 2% two and a

00:15:45.720 --> 00:15:51.040
half percent or so unanchor expectation

00:15:49.120 --> 00:15:53.318
is when when you don't have that anchor

00:15:51.039 --> 00:15:54.799
that 2% that the FED told you is

00:15:53.318 --> 00:15:56.240
whatever was the previous inflation

00:15:54.799 --> 00:15:58.198
that's what people extrapolate will be

00:15:56.240 --> 00:15:59.519
inflation for Next Period and that's a

00:15:58.198 --> 00:16:01.278
lot harder when you get into an

00:15:59.519 --> 00:16:03.519
inflationary episode in that context is

00:16:01.278 --> 00:16:05.480
very difficult because you at 5% people

00:16:03.519 --> 00:16:08.039
are still expecting 5% for next year so

00:16:05.480 --> 00:16:09.800
you need to is much harder to bring

00:16:08.039 --> 00:16:11.360
inflation down you need to create much

00:16:09.799 --> 00:16:14.479
more unemployment to bring inflation

00:16:11.360 --> 00:16:17.039
back to the 2% 2% Target okay that's

00:16:14.480 --> 00:16:19.159
that's what it means to an so anchor

00:16:17.039 --> 00:16:21.958
means Theta very close to zero an anchor

00:16:19.159 --> 00:16:25.399
Theta very close to one that's a a

00:16:21.958 --> 00:16:25.399
formal definition

00:16:31.559 --> 00:16:35.518
we then move

00:16:32.409 --> 00:16:37.919
[Music]

00:16:35.519 --> 00:16:39.278
to what I think is probably the most

00:16:37.919 --> 00:16:41.919
important model you'll see in this

00:16:39.278 --> 00:16:45.000
course which is the islm PC which is

00:16:41.919 --> 00:16:46.919
just the islm plus the Philips curve and

00:16:45.000 --> 00:16:49.240
that allow us to talk about the short

00:16:46.919 --> 00:16:52.519
run which is what we did in the slm and

00:16:49.240 --> 00:16:54.440
then all the way to the medium Run Okay

00:16:52.519 --> 00:16:56.560
in medium understood as when you go back

00:16:54.440 --> 00:17:00.399
to the Natural rate of unemployment

00:16:56.559 --> 00:17:04.679
natural level of output and so on

00:17:00.399 --> 00:17:04.680
oh we got a banking crisis there but

00:17:05.880 --> 00:17:11.839
that's

00:17:08.279 --> 00:17:14.359
oh this you may find useful here here I

00:17:11.838 --> 00:17:17.240
was trying to explain the banking crisis

00:17:14.359 --> 00:17:19.000
and and so and I said we have a model

00:17:17.240 --> 00:17:20.679
for that already remember we had this x

00:17:19.000 --> 00:17:22.959
this spreads in the investment function

00:17:20.679 --> 00:17:25.240
I said well you can think of a negative

00:17:22.959 --> 00:17:27.558
Financial shock something like a a

00:17:25.240 --> 00:17:32.558
credit spread shock as an increasing X

00:17:27.558 --> 00:17:34.160
and that will shift to left okay just

00:17:32.558 --> 00:17:36.599
saying

00:17:34.160 --> 00:17:39.960
good

00:17:36.599 --> 00:17:42.480
uh islm PC model was just going back to

00:17:39.960 --> 00:17:44.960
the islm model we're going to simplify

00:17:42.480 --> 00:17:47.038
things by not by just assuming that the

00:17:44.960 --> 00:17:50.440
Central Bank sets the real interest rate

00:17:47.038 --> 00:17:54.240
and the real interest rate is that okay

00:17:50.440 --> 00:17:56.558
ER and uh and to that we added a Philips

00:17:54.240 --> 00:17:57.839
curve but we didn't like that Philips

00:17:56.558 --> 00:17:59.599
curve because you know we have

00:17:57.839 --> 00:18:02.038
everything is a function of output here

00:17:59.599 --> 00:18:05.439
and interest rate and now we have

00:18:02.038 --> 00:18:07.640
inflation and then employment rate so

00:18:05.440 --> 00:18:10.720
yet another variable to carry around so

00:18:07.640 --> 00:18:13.720
we went from H the output Gap to an

00:18:10.720 --> 00:18:16.440
employment R an employment gap to an

00:18:13.720 --> 00:18:18.720
output Gap and and we did that just by

00:18:16.440 --> 00:18:21.480
noticing that output is equal to the

00:18:18.720 --> 00:18:25.200
labor force time one minus unemployment

00:18:21.480 --> 00:18:27.558
rate equivalently similar you can Define

00:18:25.200 --> 00:18:30.200
potential output or the natural output

00:18:27.558 --> 00:18:32.359
level as employment Time 1 minus the

00:18:30.200 --> 00:18:36.200
natural rate of unemployment subtract

00:18:32.359 --> 00:18:40.079
these two no and I you get that the

00:18:36.200 --> 00:18:42.679
output Gap is equal to minus L times the

00:18:40.079 --> 00:18:45.000
unemployment Gap and so we replace this

00:18:42.679 --> 00:18:46.640
for that expression divided by L and we

00:18:45.000 --> 00:18:49.480
end up with a Philips curve written in

00:18:46.640 --> 00:18:51.840
the form of an increasing function of

00:18:49.480 --> 00:18:54.000
the output Gap so when the output Gap is

00:18:51.839 --> 00:18:56.639
positive then inflation will exceed

00:18:54.000 --> 00:18:58.919
expected inflation if expected inflation

00:18:56.640 --> 00:19:00.919
is an anchor that is expected inflation

00:18:58.919 --> 00:19:03.080
is equal to lag inflation then that

00:19:00.919 --> 00:19:07.759
means that a positive output Gap leads

00:19:03.079 --> 00:19:11.359
to an increase in inflation inflation R

00:19:07.759 --> 00:19:13.359
okay so we look at an example here H you

00:19:11.359 --> 00:19:14.558
know this is the type of but now we're

00:19:13.359 --> 00:19:16.279
going to have the real interest rate

00:19:14.558 --> 00:19:17.879
here just makes it simpler to think

00:19:16.279 --> 00:19:19.359
about Central monetary policy in terms

00:19:17.880 --> 00:19:22.000
of the real interest rate otherwise too

00:19:19.359 --> 00:19:23.959
many things move at once so this is what

00:19:22.000 --> 00:19:26.440
we had done for quiz one here you have

00:19:23.960 --> 00:19:29.960
some particular equilibrium the islm

00:19:26.440 --> 00:19:33.080
with this real interest rate we

00:19:29.960 --> 00:19:35.400
got some equilibrium output equal to Y

00:19:33.079 --> 00:19:38.000
the new part the contribution of this

00:19:35.400 --> 00:19:40.320
block of the course is that now we need

00:19:38.000 --> 00:19:42.839
to also check whether this Y is is

00:19:40.319 --> 00:19:45.119
consistent with potential output or not

00:19:42.839 --> 00:19:47.798
with natural level of output and that

00:19:45.119 --> 00:19:51.639
for that we need to uh see whether this

00:19:47.798 --> 00:19:53.038
level of output H is consider again is

00:19:51.640 --> 00:19:54.440
above or below the natural rate of

00:19:53.038 --> 00:19:57.359
output and for that we need to look at

00:19:54.440 --> 00:20:00.400
the Philips curve okay okay and in this

00:19:57.359 --> 00:20:02.158
particular case that's not the the case

00:20:00.400 --> 00:20:04.880
because output is above the natural rate

00:20:02.159 --> 00:20:08.200
of output you put now given that

00:20:04.880 --> 00:20:10.039
observation you you put right draw here

00:20:08.200 --> 00:20:11.880
the the Philips curve you know that

00:20:10.038 --> 00:20:14.000
because output is above the natural rate

00:20:11.880 --> 00:20:15.919
of output the natural level of output

00:20:14.000 --> 00:20:18.319
that means inflation is above expected

00:20:15.919 --> 00:20:20.400
inflation if expected inflation happens

00:20:18.319 --> 00:20:23.839
to be an anchor equal to Pi minus one

00:20:20.400 --> 00:20:27.480
that means that at this output Gap that

00:20:23.839 --> 00:20:30.158
there's an inflation that is rising okay

00:20:27.480 --> 00:20:32.279
H now inflation Rising means the central

00:20:30.159 --> 00:20:33.919
bank will have to react and the way we

00:20:32.279 --> 00:20:37.240
so you'll have to do something up here

00:20:33.919 --> 00:20:39.559
you need to bring output down and how

00:20:37.240 --> 00:20:42.599
can you bring output

00:20:39.558 --> 00:20:44.678
down so so this economy is is engaging

00:20:42.599 --> 00:20:49.399
in an inflationary spiral actually given

00:20:44.679 --> 00:20:49.400
this mod of expectation how do you stop

00:20:55.640 --> 00:21:00.120
that if you are the fed and you you

00:20:58.839 --> 00:21:02.158
raise the interest rate no because you

00:21:00.119 --> 00:21:03.879
need to bring the L back so the

00:21:02.159 --> 00:21:07.120
equilibrium level of output you need

00:21:03.880 --> 00:21:09.960
increase the real rate up to a point in

00:21:07.119 --> 00:21:12.959
which um the level equilibrium level of

00:21:09.960 --> 00:21:15.600
output is equal to the Natural rate of

00:21:12.960 --> 00:21:17.200
output um and you may have to do more

00:21:15.599 --> 00:21:19.119
than that if inflation was an anchor and

00:21:17.200 --> 00:21:21.120
you find yourself with 5% inflation you

00:21:19.119 --> 00:21:23.519
may have to temporarily actually to

00:21:21.119 --> 00:21:25.239
bring inflation back down to 2% you may

00:21:23.519 --> 00:21:27.639
have to overshoot raise interest rate a

00:21:25.240 --> 00:21:30.720
lot generate a negative output gap for a

00:21:27.640 --> 00:21:33.240
while and then once you reach the level

00:21:30.720 --> 00:21:35.839
of inflation you like the 2% then you

00:21:33.240 --> 00:21:39.079
can go back uh to the Natural level of

00:21:35.839 --> 00:21:40.720
output okay so that's the reason central

00:21:39.079 --> 00:21:42.359
banks worry a lot about unanchor

00:21:40.720 --> 00:21:43.798
expectations because then they know that

00:21:42.359 --> 00:21:46.119
they find themselves an inflation above

00:21:43.798 --> 00:21:48.038
their target is not going to be enough

00:21:46.119 --> 00:21:49.678
to bring the output Gap to zero they're

00:21:48.038 --> 00:21:52.480
going to have to overshoot in the way

00:21:49.679 --> 00:21:54.038
down in order to re re-anchor expect

00:21:52.480 --> 00:21:56.159
well in order to bring inflation back

00:21:54.038 --> 00:21:58.798
down to the Target of

00:21:56.159 --> 00:22:01.840
2% but in any event even if inflation

00:21:58.798 --> 00:22:03.519
are expect well anchor you still have to

00:22:01.839 --> 00:22:04.918
bring output down because at the very

00:22:03.519 --> 00:22:07.440
least you need to close this pos

00:22:04.919 --> 00:22:09.520
positive output Gap and that if you're

00:22:07.440 --> 00:22:10.759
the FED in the US or any Central Bank

00:22:09.519 --> 00:22:12.759
you do it by increasing the real

00:22:10.759 --> 00:22:14.679
interest rate now in practice central

00:22:12.759 --> 00:22:15.839
banks really don't control the real

00:22:14.679 --> 00:22:17.200
interest they control the nominal

00:22:15.839 --> 00:22:19.480
interest ratees so there's a little

00:22:17.200 --> 00:22:20.720
fight there between inflation and and

00:22:19.480 --> 00:22:22.640
what they do to the nominal interest

00:22:20.720 --> 00:22:27.159
rate but let's ignore that complication

00:22:22.640 --> 00:22:29.720
for now okay now H suppose that the FED

00:22:27.159 --> 00:22:32.960
is is is in vacation

00:22:29.720 --> 00:22:35.480
and and and so and and somebody someone

00:22:32.960 --> 00:22:38.319
else you know decides in the government

00:22:35.480 --> 00:22:40.240
decides that no we cannot have this very

00:22:38.319 --> 00:22:42.519
high level of inflation so what else

00:22:40.240 --> 00:22:42.519
could you

00:22:42.679 --> 00:22:50.798
do and you're not the FED fed in

00:22:46.880 --> 00:22:52.960
vacation who else can make

00:22:50.798 --> 00:22:54.759
policy the government the central

00:22:52.960 --> 00:22:57.319
government the treasury and so on no

00:22:54.759 --> 00:22:59.319
what is the instrument they have what do

00:22:57.319 --> 00:23:00.759
they need to do

00:22:59.319 --> 00:23:02.119
the problem they have is output is too

00:23:00.759 --> 00:23:04.359
high and that's what is leading to lots

00:23:02.119 --> 00:23:08.158
of inflation so

00:23:04.359 --> 00:23:08.158
what do you think they should

00:23:09.919 --> 00:23:15.120
do c govern expend raise taxes something

00:23:12.960 --> 00:23:17.440
of that kind okay but they need a fiscal

00:23:15.119 --> 00:23:20.119
contraction because that will bring the

00:23:17.440 --> 00:23:23.320
yes down and so equilibrium

00:23:20.119 --> 00:23:25.000
output will be lower okay so that's an

00:23:23.319 --> 00:23:28.000
alternative you have you should know

00:23:25.000 --> 00:23:28.000
this

00:23:32.599 --> 00:23:37.119
and here I just did what we just

00:23:34.640 --> 00:23:39.600
discussed just in in a steps these

00:23:37.119 --> 00:23:41.399
things happen slowly the F doesn't hike

00:23:39.599 --> 00:23:43.798
interest rate in one shot and so on it

00:23:41.400 --> 00:23:46.080
takes a while before you get to the

00:23:43.798 --> 00:23:46.079
final

00:23:53.319 --> 00:23:57.599
equilibrium oh I I show you the

00:23:55.558 --> 00:23:59.079
deflationary spiral said sometimes

00:23:57.599 --> 00:24:02.439
things can get very

00:23:59.079 --> 00:24:04.879
complicated ER because you may hit the

00:24:02.440 --> 00:24:06.960
zero lower bound the FED can bring the

00:24:04.880 --> 00:24:09.360
nominal interest R to zero but if

00:24:06.960 --> 00:24:10.720
inflation is already low that may not

00:24:09.359 --> 00:24:12.079
give you the real interest that you need

00:24:10.720 --> 00:24:14.038
in order to get output equal to the

00:24:12.079 --> 00:24:16.599
Natural rate of output I me here was one

00:24:14.038 --> 00:24:18.278
example in which you need a negative

00:24:16.599 --> 00:24:20.959
real interest rate to get output to be

00:24:18.278 --> 00:24:23.880
equal to Natural rate of output but that

00:24:20.960 --> 00:24:26.798
may not happen because you you you hit

00:24:23.880 --> 00:24:28.720
the zero lower bound H and so at that

00:24:26.798 --> 00:24:31.158
point the problem you have is that and

00:24:28.720 --> 00:24:35.360
that's was the trag tragedy of Japan for

00:24:31.159 --> 00:24:38.000
so long is that not

00:24:35.359 --> 00:24:40.038
only you cannot bring the interest rate

00:24:38.000 --> 00:24:41.798
the nominal interest rate below zero but

00:24:40.038 --> 00:24:43.398
you start getting into deflationary

00:24:41.798 --> 00:24:45.319
inflation below expectation and

00:24:43.398 --> 00:24:47.278
expectation goes to number very close to

00:24:45.319 --> 00:24:49.359
zero because of an anchor deflation

00:24:47.278 --> 00:24:51.558
expectations then you start getting

00:24:49.359 --> 00:24:53.319
negative expected inflation and when you

00:24:51.558 --> 00:24:54.918
get Negative expected inflation even if

00:24:53.319 --> 00:24:56.158
you're at the zero lower Bound in the

00:24:54.919 --> 00:24:57.679
nominal interest rate that means a

00:24:56.159 --> 00:24:59.120
positive real interest rate so

00:24:57.679 --> 00:25:00.559
effectively you're increasing interest

00:24:59.119 --> 00:25:02.839
rate at the same time and that can be a

00:25:00.558 --> 00:25:04.200
very complicated thing to get out of

00:25:02.839 --> 00:25:05.359
again that's what happened to Japan for

00:25:04.200 --> 00:25:07.798
a long

00:25:05.359 --> 00:25:09.959
time what would you do if as a

00:25:07.798 --> 00:25:12.158
government if you fall into a situation

00:25:09.960 --> 00:25:12.159
like

00:25:12.839 --> 00:25:18.558
that and Japan did a lot of

00:25:16.079 --> 00:25:21.158
that well you can do lots of things but

00:25:18.558 --> 00:25:23.519
but in particular of the kind of things

00:25:21.159 --> 00:25:25.480
you know what what would you do if you

00:25:23.519 --> 00:25:27.519
are in a situation like this in which

00:25:25.480 --> 00:25:29.880
the zero lower bound is binding and and

00:25:27.519 --> 00:25:31.960
inflation is actually falling here I had

00:25:29.880 --> 00:25:34.200
a benign case in which inflation

00:25:31.960 --> 00:25:35.399
expectation was well anchor that's not

00:25:34.200 --> 00:25:36.600
what happened to Japan after they

00:25:35.398 --> 00:25:39.119
experienced a long period of

00:25:36.599 --> 00:25:40.959
deflationary forces the then the people

00:25:39.119 --> 00:25:46.119
began to expect more deflation more

00:25:40.960 --> 00:25:46.120
deflation and so on so what else can you

00:25:51.558 --> 00:25:57.200
do let me give you a hint Japan is one

00:25:55.200 --> 00:25:59.480
of the countries has the highest levels

00:25:57.200 --> 00:26:02.558
of public debt

00:25:59.480 --> 00:26:05.519
how do you accumulate public

00:26:02.558 --> 00:26:07.678
debt yeah you you need to borrow a lot

00:26:05.519 --> 00:26:08.918
you have big fiscal deficit so that's

00:26:07.679 --> 00:26:11.000
the way you can fight this you know you

00:26:08.919 --> 00:26:12.840
can shift the yes to the right by having

00:26:11.000 --> 00:26:15.200
an expansionary fiscal policy that's the

00:26:12.839 --> 00:26:16.558
only tool really you have you lose the

00:26:15.200 --> 00:26:18.319
power of monetary policy against the

00:26:16.558 --> 00:26:19.918
zero lower bound but you still have

00:26:18.319 --> 00:26:23.278
fiscal policy and they did a lot of

00:26:19.919 --> 00:26:23.278
fiscal policy

00:26:28.359 --> 00:26:33.599
not

00:26:29.960 --> 00:26:36.759
interesting this is this is interesting

00:26:33.599 --> 00:26:38.359
ER that's a different kind of shock

00:26:36.759 --> 00:26:40.599
suppose you are at your medium run

00:26:38.359 --> 00:26:43.158
equilibrium and then all of a sudden

00:26:40.599 --> 00:26:45.119
markups go up perhaps for example

00:26:43.159 --> 00:26:49.000
because the price of oil went up a lot

00:26:45.119 --> 00:26:50.119
and something like that so then what you

00:26:49.000 --> 00:26:51.919
then that's a different kind of shock

00:26:50.119 --> 00:26:53.359
from the previous one from from any

00:26:51.919 --> 00:26:54.720
fiscal sh or anything like that that's

00:26:53.359 --> 00:26:56.798
an aggregate demand this is an agre

00:26:54.720 --> 00:27:00.240
supply problem because the first thing I

00:26:56.798 --> 00:27:01.839
know of a permanent at least change in m

00:27:00.240 --> 00:27:02.960
is that the natural rate of unemployment

00:27:01.839 --> 00:27:05.398
has to

00:27:02.960 --> 00:27:07.558
rise if the natural rate of unemployment

00:27:05.398 --> 00:27:09.038
has to rise that mean my Philips Curve

00:27:07.558 --> 00:27:12.158
will shift

00:27:09.038 --> 00:27:13.839
now okay in that particular case I know

00:27:12.159 --> 00:27:16.799
the Philips Curve will shift to the left

00:27:13.839 --> 00:27:17.959
how do I know that well because I know

00:27:16.798 --> 00:27:20.119
that that the natural rate of

00:27:17.960 --> 00:27:22.600
unemployment went up which means the

00:27:20.119 --> 00:27:24.519
natural rate of natural level of output

00:27:22.599 --> 00:27:26.678
has to come down and the natural level

00:27:24.519 --> 00:27:28.558
of output coming down means simply that

00:27:26.679 --> 00:27:30.320
that the level at which is expected

00:27:28.558 --> 00:27:32.960
inflation and inflation are

00:27:30.319 --> 00:27:35.079
equal happens at a lower level of output

00:27:32.960 --> 00:27:36.880
so the Philips can move to the left so

00:27:35.079 --> 00:27:38.599
suppose you were in this equilibrium

00:27:36.880 --> 00:27:41.399
here I'm doing for the case of an anchor

00:27:38.599 --> 00:27:44.678
expectations but the same logic goes for

00:27:41.398 --> 00:27:46.398
the case of anchor expectation ER so

00:27:44.679 --> 00:27:47.759
suppose you were at some equilibrium

00:27:46.398 --> 00:27:49.639
like this it was your medium run

00:27:47.759 --> 00:27:51.798
equilibrium but now the price of energy

00:27:49.640 --> 00:27:53.919
goes up a lot and and and you expect

00:27:51.798 --> 00:27:56.119
that to last for a while that means the

00:27:53.919 --> 00:27:58.720
Philips curve moves up so that means

00:27:56.119 --> 00:28:00.439
that if output with output at this level

00:27:58.720 --> 00:28:02.600
now you get you have a problem because

00:28:00.440 --> 00:28:05.120
you start getting inflation out of this

00:28:02.599 --> 00:28:07.678
okay because this this level of output

00:28:05.119 --> 00:28:09.918
is too high relative to the new level of

00:28:07.679 --> 00:28:11.640
the natural the new level of natural

00:28:09.919 --> 00:28:13.960
level of output so you have a positive

00:28:11.640 --> 00:28:16.240
output Gap positive output Gap means

00:28:13.960 --> 00:28:18.079
inflation above expected inflation if

00:28:16.240 --> 00:28:20.000
you have an anchor expectations means

00:28:18.079 --> 00:28:21.558
inflation starts

00:28:20.000 --> 00:28:24.640
rising

00:28:21.558 --> 00:28:26.319
up so that means the FED now needs to

00:28:24.640 --> 00:28:29.679
react to that and needs to tighten

00:28:26.319 --> 00:28:32.599
interest rate in order to to go to a new

00:28:29.679 --> 00:28:35.120
level of H natural level of output okay

00:28:32.599 --> 00:28:37.000
and that's the response but if the F

00:28:35.119 --> 00:28:38.839
that's not react and a little bit of

00:28:37.000 --> 00:28:41.000
this is what happened we had some Supply

00:28:38.839 --> 00:28:42.558
shocks and so on that were considered to

00:28:41.000 --> 00:28:44.919
be temporary well they weren't as

00:28:42.558 --> 00:28:46.639
temporary so there was no reaction but

00:28:44.919 --> 00:28:50.360
it turns out that that they lasted a lot

00:28:46.640 --> 00:28:52.679
longer than the fair expected and so so

00:28:50.359 --> 00:28:56.038
so now they had to catch up

00:28:52.679 --> 00:28:59.038
okay that was part of the reason we got

00:28:56.038 --> 00:29:01.359
into a high inflation episode

00:28:59.038 --> 00:29:04.519
that was the main reason in

00:29:01.359 --> 00:29:07.000
Europe the US is a mixture of aggregate

00:29:04.519 --> 00:29:10.679
demand lots of fiscal policy and so on

00:29:07.000 --> 00:29:13.720
and ER and supply side in Europe was

00:29:10.679 --> 00:29:13.720
very much a story of this

00:29:19.240 --> 00:29:24.919
kind well a financial Panic you need to

00:29:22.960 --> 00:29:27.278
upset it with a decline in in in real

00:29:24.919 --> 00:29:29.278
interest rate and a little bit of that

00:29:27.278 --> 00:29:31.319
has been happening it's not the FED that

00:29:29.278 --> 00:29:33.398
has cut their rates but but the markets

00:29:31.319 --> 00:29:36.278
have anticipated the FED will not raise

00:29:33.398 --> 00:29:38.558
interest rate as much as they expected

00:29:36.278 --> 00:29:41.359
before we got we got into this banking

00:29:38.558 --> 00:29:43.200
mess so we had already sort of studied

00:29:41.359 --> 00:29:45.839
the short run the medium run and now we

00:29:43.200 --> 00:29:47.880
want to look at the long run okay and

00:29:45.839 --> 00:29:52.199
that's what economic growth is about

00:29:47.880 --> 00:29:52.200
economic growth Theory and facts and so

00:29:53.798 --> 00:30:01.839
on let me go to so one of the things I

00:29:58.599 --> 00:30:04.599
I highlighted is that we tend to

00:30:01.839 --> 00:30:07.599
see among countries that are fairly

00:30:04.599 --> 00:30:07.599
similar

00:30:07.679 --> 00:30:13.600
along education and variables like that

00:30:11.278 --> 00:30:15.640
systems economic systems and political

00:30:13.599 --> 00:30:18.240
systems and so on you tend to find

00:30:15.640 --> 00:30:21.080
relationship like this that is countries

00:30:18.240 --> 00:30:22.558
with a lower per capita income at the

00:30:21.079 --> 00:30:24.319
beginning of the sample tend to grow

00:30:22.558 --> 00:30:26.278
faster in the sample and that captures

00:30:24.319 --> 00:30:28.519
very much the idea that there's a

00:30:26.278 --> 00:30:31.278
convergence there's a force towards

00:30:28.519 --> 00:30:34.319
convergence of H income per capita if

00:30:31.278 --> 00:30:36.038
you will okay that's another

00:30:34.319 --> 00:30:40.200
illustration of that phenomenon lots of

00:30:36.038 --> 00:30:41.599
dispersion here ER 70 years later a lot

00:30:40.200 --> 00:30:43.840
less

00:30:41.599 --> 00:30:46.599
dispersion but we also said that some

00:30:43.839 --> 00:30:50.119
countries that do not match that and but

00:30:46.599 --> 00:30:53.398
we focus most of what we did in

00:30:50.119 --> 00:30:55.518
growth on understanding this process the

00:30:53.398 --> 00:30:57.000
process of convergence and how it

00:30:55.519 --> 00:30:59.319
happened with without technological

00:30:57.000 --> 00:31:02.720
progress and so on and then we spent a

00:30:59.319 --> 00:31:04.879
little bit of a lecture say at most 10

00:31:02.720 --> 00:31:07.120
10 points worth in a quiz or seven

00:31:04.880 --> 00:31:11.240
points talking about sort of anomalies

00:31:07.119 --> 00:31:11.239
and things like that no five points or

00:31:12.159 --> 00:31:18.720
something so the key ER object here one

00:31:16.159 --> 00:31:21.360
of the key objects there there are a

00:31:18.720 --> 00:31:22.798
couple but but one of them was well now

00:31:21.359 --> 00:31:24.479
we need to be a little bit more serious

00:31:22.798 --> 00:31:27.158
about the production function we said

00:31:24.480 --> 00:31:28.880
because for the short it's okay to take

00:31:27.159 --> 00:31:30.440
Capital as given and just worry about

00:31:28.880 --> 00:31:32.200
most of the fluctuation in output will

00:31:30.440 --> 00:31:34.798
come from fluctuations in

00:31:32.200 --> 00:31:36.480
employment that's not so over long

00:31:34.798 --> 00:31:39.599
periods of time capital accumulation

00:31:36.480 --> 00:31:41.960
plays a huge role and so we need to be

00:31:39.599 --> 00:31:44.918
explicit about the fact that Capital

00:31:41.960 --> 00:31:47.960
matters a lot for production

00:31:44.919 --> 00:31:50.440
okay and so we postulated a production

00:31:47.960 --> 00:31:52.720
function like this output as increas

00:31:50.440 --> 00:31:54.960
increasing function of cap and of

00:31:52.720 --> 00:31:56.079
capital and labor and now we said for

00:31:54.960 --> 00:31:57.960
this part of the course we're not going

00:31:56.079 --> 00:31:59.678
to worry about unemployment and so on

00:31:57.960 --> 00:32:02.240
employment labor force population

00:31:59.679 --> 00:32:04.320
they're all the same for us here for

00:32:02.240 --> 00:32:06.319
this part of the course and then said

00:32:04.319 --> 00:32:07.798
this production function has some

00:32:06.319 --> 00:32:10.599
important

00:32:07.798 --> 00:32:12.679
properties one is it has constant

00:32:10.599 --> 00:32:14.158
returns to scale things change quite a

00:32:12.679 --> 00:32:15.798
bit if you don't have constant return to

00:32:14.159 --> 00:32:18.679
scale so we have constant return to

00:32:15.798 --> 00:32:21.480
scale which means you should know this

00:32:18.679 --> 00:32:23.559
that if you scale all output all input

00:32:21.480 --> 00:32:26.440
all the factors of Productions by the

00:32:23.558 --> 00:32:29.960
same factor output Also Rises by the

00:32:26.440 --> 00:32:32.480
same factor okay so a production

00:32:29.960 --> 00:32:36.679
function we use a lot was aob Douglas

00:32:32.480 --> 00:32:38.519
you know output equal square root of K *

00:32:36.679 --> 00:32:41.320
the square root of n well the sum of

00:32:38.519 --> 00:32:42.798
those exponents is one so that's a a

00:32:41.319 --> 00:32:46.079
production function with constant return

00:32:42.798 --> 00:32:48.200
to scale okay so anything that has the

00:32:46.079 --> 00:32:50.319
exponents add up to one then you're

00:32:48.200 --> 00:32:54.240
that's a constant return to scale

00:32:50.319 --> 00:32:57.000
technology but importantly and it also

00:32:54.240 --> 00:32:58.599
has decreasing returns with each of its

00:32:57.000 --> 00:33:01.880
factor of production

00:32:58.599 --> 00:33:04.038
that means as you rather than moving

00:33:01.880 --> 00:33:05.880
both factors of production up you move

00:33:04.038 --> 00:33:08.359
only one well you're going to increase

00:33:05.880 --> 00:33:10.039
output but as just keep increasing that

00:33:08.359 --> 00:33:11.558
factor alone you're going to increase

00:33:10.038 --> 00:33:13.278
output by less and less and less and

00:33:11.558 --> 00:33:14.319
less because essentially has fewer and

00:33:13.278 --> 00:33:17.119
fewer of the

00:33:14.319 --> 00:33:19.240
other factor of production to work with

00:33:17.119 --> 00:33:22.000
okay and so that's decreasing returns to

00:33:19.240 --> 00:33:23.679
Capital or labor I mean if you fix the

00:33:22.000 --> 00:33:25.480
other factor of production you move up

00:33:23.679 --> 00:33:28.840
it's going to increase at a decreasing

00:33:25.480 --> 00:33:32.240
rate so one normalization that we start

00:33:28.839 --> 00:33:35.480
with was well a scaling Factor could be

00:33:32.240 --> 00:33:37.798
a population one over population okay

00:33:35.480 --> 00:33:40.759
that's a scaling factor and if I do that

00:33:37.798 --> 00:33:44.440
I multiply both everything by one / n

00:33:40.759 --> 00:33:47.038
would go into output per person is an

00:33:44.440 --> 00:33:49.240
increasing function of a increasing

00:33:47.038 --> 00:33:52.839
function but at a increasing rate of

00:33:49.240 --> 00:33:56.120
capital per person okay we plot that

00:33:52.839 --> 00:33:58.158
function here and and this conc is

00:33:56.119 --> 00:34:03.038
increasing but it's concave that shows

00:33:58.159 --> 00:34:05.159
the decreasing returns of capital no h

00:34:03.038 --> 00:34:07.279
and we got that function there then the

00:34:05.159 --> 00:34:12.159
SEC uh and we talk

00:34:07.279 --> 00:34:16.079
well we said H so so so when you move in

00:34:12.159 --> 00:34:18.398
this you can increase output per person

00:34:16.079 --> 00:34:20.679
per per person by simply increasing

00:34:18.398 --> 00:34:23.358
Capital per person and the more you

00:34:20.679 --> 00:34:25.119
increase Capital per person output will

00:34:23.358 --> 00:34:27.519
increase more and more but but but at a

00:34:25.119 --> 00:34:29.280
decreasing rate you can see that moving

00:34:27.519 --> 00:34:31.239
a the distance between A and B is the

00:34:29.280 --> 00:34:32.919
same as the distance between C and D

00:34:31.239 --> 00:34:35.959
however the increasing output when you

00:34:32.918 --> 00:34:38.039
go from A to B is enormous compar when

00:34:35.960 --> 00:34:39.639
compare with the increasing output that

00:34:38.039 --> 00:34:43.000
you get from the increasing capitals

00:34:39.639 --> 00:34:45.559
over per per person from C to D okay

00:34:43.000 --> 00:34:49.280
decreasing returns this there is another

00:34:45.559 --> 00:34:51.918
way of of increasing output per person

00:34:49.280 --> 00:34:54.399
which is with technological progress

00:34:51.918 --> 00:34:57.319
when the function f shifting up over

00:34:54.398 --> 00:34:59.719
time and we split the two main lectures

00:34:57.320 --> 00:35:02.720
in grow both into one part one in which

00:34:59.719 --> 00:35:05.199
we just we shut down the second Channel

00:35:02.719 --> 00:35:09.480
and then the second important lecture

00:35:05.199 --> 00:35:12.519
here had we focus on this channel so

00:35:09.480 --> 00:35:12.519
that's a that's what we

00:35:14.280 --> 00:35:19.960
have so let's go to when I shut down

00:35:17.119 --> 00:35:21.480
this channel for now and focus on on the

00:35:19.960 --> 00:35:24.358
case without technological progress

00:35:21.480 --> 00:35:26.119
first okay so so we put things together

00:35:24.358 --> 00:35:29.960
we said this is comes from the previous

00:35:26.119 --> 00:35:33.960
lecture we can write a output per

00:35:29.960 --> 00:35:37.960
uh per person as an increasing function

00:35:33.960 --> 00:35:41.280
of um Capital per person second key

00:35:37.960 --> 00:35:43.880
equation is well this is a proper it has

00:35:41.280 --> 00:35:46.320
to be if you in a closed economy no over

00:35:43.880 --> 00:35:48.280
expenditure or anything like we could

00:35:46.320 --> 00:35:50.800
add that but it's not important for the

00:35:48.280 --> 00:35:52.079
message then investment has to be equal

00:35:50.800 --> 00:35:54.000
so investment is going to be very

00:35:52.079 --> 00:35:57.039
important here because it's what will

00:35:54.000 --> 00:35:58.440
make the Capital stock grow but there

00:35:57.039 --> 00:36:01.358
has to be funed fing for that and the

00:35:58.440 --> 00:36:02.720
funding come from saving okay and we

00:36:01.358 --> 00:36:04.400
simplify things by assuming that the

00:36:02.719 --> 00:36:06.519
saving function is just proportional to

00:36:04.400 --> 00:36:08.119
the level of output which is reasonable

00:36:06.519 --> 00:36:10.039
when you think about long run all these

00:36:08.119 --> 00:36:12.000
things scale up when you're thinking

00:36:10.039 --> 00:36:14.719
about very shortterm no we have some

00:36:12.000 --> 00:36:17.079
constants and so on floating around but

00:36:14.719 --> 00:36:20.358
but but over the long run things do

00:36:17.079 --> 00:36:21.880
scale up and so we can write investment

00:36:20.358 --> 00:36:24.000
in equilibrium investment has to be

00:36:21.880 --> 00:36:26.760
equal to saving saving is proportional

00:36:24.000 --> 00:36:30.318
to Output so we get that investment in

00:36:26.760 --> 00:36:31.920
this economy is increasing in output

00:36:30.318 --> 00:36:35.400
this is an constant somewhere between

00:36:31.920 --> 00:36:36.639
zero and one okay and the last key

00:36:35.400 --> 00:36:38.000
equation here is the capital

00:36:36.639 --> 00:36:41.480
accumulation equation the capital

00:36:38.000 --> 00:36:45.239
accumulation equation says that Capital

00:36:41.480 --> 00:36:47.639
t+ One is equal to Capital today minus

00:36:45.239 --> 00:36:50.559
the depreciation some a fraction of the

00:36:47.639 --> 00:36:54.358
machines break down in every period but

00:36:50.559 --> 00:36:56.719
plus the new investment plus I okay and

00:36:54.358 --> 00:36:59.759
we rote things and replace the saving

00:36:56.719 --> 00:37:02.000
function and so on and we end up in in

00:36:59.760 --> 00:37:04.480
in qu an expression like this that says

00:37:02.000 --> 00:37:06.760
Capital per person here grows with

00:37:04.480 --> 00:37:08.000
investment which is funded by savings

00:37:06.760 --> 00:37:09.680
which is an increasing function of

00:37:08.000 --> 00:37:12.400
output which in turn is an increasing

00:37:09.679 --> 00:37:14.639
function of capital per person minus

00:37:12.400 --> 00:37:17.559
whatever is the depreciation and what we

00:37:14.639 --> 00:37:20.118
did then the the start diagram in in in

00:37:17.559 --> 00:37:22.480
the solo model is is we plot this

00:37:20.119 --> 00:37:23.960
function and that function we know that

00:37:22.480 --> 00:37:27.599
the state state is when these two things

00:37:23.960 --> 00:37:31.039
are equal that pins down the K star of

00:37:27.599 --> 00:37:33.720
over n k Over N start of this economy

00:37:31.039 --> 00:37:35.599
but we also know that to the left of

00:37:33.719 --> 00:37:39.078
that point in in capital

00:37:35.599 --> 00:37:41.960
space this term is greater than that and

00:37:39.079 --> 00:37:44.960
therefore H the Capital stock is rising

00:37:41.960 --> 00:37:46.400
to the right we get that this term is

00:37:44.960 --> 00:37:49.240
greater than that and therefore the

00:37:46.400 --> 00:37:51.480
Capital stock is falling okay and that's

00:37:49.239 --> 00:37:53.679
what we have in this diagram so that's

00:37:51.480 --> 00:37:55.639
the state of the economy when when the

00:37:53.679 --> 00:37:58.358
depreciation per worker which is the

00:37:55.639 --> 00:38:00.000
require in the minimum in you need to

00:37:58.358 --> 00:38:03.318
keep the Capital stock constant is

00:38:00.000 --> 00:38:05.280
whatever is depreciation per worker no

00:38:03.318 --> 00:38:07.119
anything else you do it will grow the

00:38:05.280 --> 00:38:08.280
stock of capital anything less you do

00:38:07.119 --> 00:38:10.200
you're not maintaining enough of your

00:38:08.280 --> 00:38:13.400
Capital stock is declining and that's

00:38:10.199 --> 00:38:17.279
exactly what happens here that's State

00:38:13.400 --> 00:38:18.838
you have Capital below that then then uh

00:38:17.280 --> 00:38:20.640
Capital stock will be rising because you

00:38:18.838 --> 00:38:22.199
have lots of saving and therefore lots

00:38:20.639 --> 00:38:23.679
of investment relative to what you need

00:38:22.199 --> 00:38:26.439
in order to maintain the stock of the

00:38:23.679 --> 00:38:29.440
small stock of capital you have until

00:38:26.440 --> 00:38:29.440
you reach a c state

00:38:29.838 --> 00:38:36.920
and the and you know the this model

00:38:34.199 --> 00:38:39.239
alone can explain really the that

00:38:36.920 --> 00:38:41.159
pattern we have that that you know that

00:38:39.239 --> 00:38:43.479
the poorer economies tended to grow

00:38:41.159 --> 00:38:45.118
faster than the Richer economies if you

00:38:43.480 --> 00:38:48.358
think of poorer economies as economies

00:38:45.119 --> 00:38:51.000
that are otherwise similar but that have

00:38:48.358 --> 00:38:52.480
low a low stock of capital to start with

00:38:51.000 --> 00:38:54.280
well those economies are going to be to

00:38:52.480 --> 00:38:55.920
the left of the stady state and

00:38:54.280 --> 00:38:57.560
therefore they're going to tend to grow

00:38:55.920 --> 00:39:00.960
at whatever is the steady state rate of

00:38:57.559 --> 00:39:03.358
growth plus this catching up growth okay

00:39:00.960 --> 00:39:06.440
and so this is a very powerful little

00:39:03.358 --> 00:39:08.598
model it can explain a lot of that those

00:39:06.440 --> 00:39:11.800
convergence the convergence that we saw

00:39:08.599 --> 00:39:14.200
in in the data

00:39:11.800 --> 00:39:17.560
okay do you understand

00:39:14.199 --> 00:39:17.559
this this is

00:39:17.679 --> 00:39:22.919
important

00:39:20.599 --> 00:39:24.359
okay then we did some experiments what

00:39:22.920 --> 00:39:26.039
happens if you increase the saving rate

00:39:24.358 --> 00:39:27.880
at the time when solo was writing this

00:39:26.039 --> 00:39:30.318
model many people said that what was

00:39:27.880 --> 00:39:33.240
behind growth was saving well in this

00:39:30.318 --> 00:39:36.119
model we show that indeed if a saving

00:39:33.239 --> 00:39:38.039
rate Rises then you at any given level

00:39:36.119 --> 00:39:40.559
of capital suppose that was the oldest

00:39:38.039 --> 00:39:44.800
state if now the saving rate Rises that

00:39:40.559 --> 00:39:46.719
will increase H increase investment

00:39:44.800 --> 00:39:48.480
above what you need to maintain that

00:39:46.719 --> 00:39:50.159
level of the stock of capital so the

00:39:48.480 --> 00:39:52.800
stock stock of capital going to start

00:39:50.159 --> 00:39:54.920
growing when that happens output per

00:39:52.800 --> 00:39:56.720
capita will grow faster than in a state

00:39:54.920 --> 00:39:58.680
state because you're going to go be

00:39:56.719 --> 00:40:00.358
going from here to there but eventually

00:39:58.679 --> 00:40:02.078
you'll converge to the same whole rate

00:40:00.358 --> 00:40:04.679
of growth so the point here is that the

00:40:02.079 --> 00:40:06.200
saving rate cannot change per se does

00:40:04.679 --> 00:40:08.039
not change the rate of growth in the

00:40:06.199 --> 00:40:10.399
long run but it gives you transitional

00:40:08.039 --> 00:40:12.759
growth and a lot of the the Asian

00:40:10.400 --> 00:40:15.920
Miracle of the very fast rates of growth

00:40:12.760 --> 00:40:17.920
from the 60s and 70s and 80s has to do

00:40:15.920 --> 00:40:19.720
with this kind of thing very sudden

00:40:17.920 --> 00:40:22.039
increasing saving rates plus other

00:40:19.719 --> 00:40:24.239
institutional changes and so on but High

00:40:22.039 --> 00:40:27.759
increase in the saving rate that also Le

00:40:24.239 --> 00:40:29.399
led to very fast growth okay so again

00:40:27.760 --> 00:40:31.760
this little model can explain a lot as

00:40:29.400 --> 00:40:34.160
well it can explain when you see those

00:40:31.760 --> 00:40:35.480
growth Miracles often is associated to

00:40:34.159 --> 00:40:37.639
some for some

00:40:35.480 --> 00:40:40.358
reason varies a lot across different

00:40:37.639 --> 00:40:41.759
scenarios the saving rate went up quite

00:40:40.358 --> 00:40:44.880
a

00:40:41.760 --> 00:40:46.280
bit but point is so that gives you very

00:40:44.880 --> 00:40:49.800
fast growth in the short term but

00:40:46.280 --> 00:40:53.519
eventually pets out

00:40:49.800 --> 00:40:55.720
okay so the the the next thing we all

00:40:53.519 --> 00:40:58.318
that we did for a fixed population it

00:40:55.719 --> 00:40:59.598
said well so suppose now the population

00:40:58.318 --> 00:41:02.719
is

00:40:59.599 --> 00:41:04.160
growing H I said the diagram we had

00:41:02.719 --> 00:41:05.598
before would be very unpleasant because

00:41:04.159 --> 00:41:07.199
all these curves would be shifting so

00:41:05.599 --> 00:41:08.760
what we need well what we need to do is

00:41:07.199 --> 00:41:11.159
divide not by a constant we need to

00:41:08.760 --> 00:41:13.480
divide by whatever is the population at

00:41:11.159 --> 00:41:15.399
that point in time and that will give us

00:41:13.480 --> 00:41:17.639
the same diagram we had with one little

00:41:15.400 --> 00:41:20.760
twist so I went through sort of a little

00:41:17.639 --> 00:41:24.159
algebra here to arrive to a capital

00:41:20.760 --> 00:41:26.319
accumulation equation Capital per person

00:41:24.159 --> 00:41:28.519
equ an equation for the change in the

00:41:26.318 --> 00:41:30.639
capital per person which is very similar

00:41:28.519 --> 00:41:33.599
to what we had the only difference is

00:41:30.639 --> 00:41:35.199
that the required capital investment

00:41:33.599 --> 00:41:37.720
required to maintain the stock of

00:41:35.199 --> 00:41:39.598
capital per person has an extra term

00:41:37.719 --> 00:41:43.000
here

00:41:39.599 --> 00:41:44.480
GM and I said that GM so let's think

00:41:43.000 --> 00:41:49.679
about this

00:41:44.480 --> 00:41:51.079
term so Delta so think of this as the

00:41:49.679 --> 00:41:52.960
required

00:41:51.079 --> 00:41:54.480
investment in order to maintain the

00:41:52.960 --> 00:41:58.679
stock of capital where it

00:41:54.480 --> 00:42:00.079
was ER if if h this Delta comes from the

00:41:58.679 --> 00:42:01.879
fact that well you have a stock of

00:42:00.079 --> 00:42:03.440
capital you lose a fraction of that well

00:42:01.880 --> 00:42:04.960
you need an investment equal to that

00:42:03.440 --> 00:42:07.440
fraction that you lost in order to

00:42:04.960 --> 00:42:10.000
maintain the stock of capital the same

00:42:07.440 --> 00:42:12.880
that's that's that's that's

00:42:10.000 --> 00:42:16.119
clear but that's not enough to maintain

00:42:12.880 --> 00:42:18.680
the capital per person constant if if

00:42:16.119 --> 00:42:21.400
per person is rising population is

00:42:18.679 --> 00:42:23.799
rising because even if you maintain the

00:42:21.400 --> 00:42:25.800
stock of capital constant the

00:42:23.800 --> 00:42:28.000
denominator is rising at the rate of

00:42:25.800 --> 00:42:30.280
population growth

00:42:28.000 --> 00:42:32.760
so in order to maintain the capital per

00:42:30.280 --> 00:42:35.240
person constant you need to deal with

00:42:32.760 --> 00:42:36.599
the growth of denominator as well and

00:42:35.239 --> 00:42:38.959
that means you need a little you need

00:42:36.599 --> 00:42:42.280
also investment to match the increase in

00:42:38.960 --> 00:42:45.280
population so they can keep the capital

00:42:42.280 --> 00:42:47.000
per person constant okay so that's a

00:42:45.280 --> 00:42:49.079
that's a modification so in terms of our

00:42:47.000 --> 00:42:50.639
diagram all that happened here I have

00:42:49.079 --> 00:42:52.680
technological progress as well set it to

00:42:50.639 --> 00:42:55.519
zero for now all that happened relative

00:42:52.679 --> 00:42:57.759
to the previous diagram is that now this

00:42:55.519 --> 00:43:00.519
I rotated this curve up upward a little

00:42:57.760 --> 00:43:00.520
bit okay

00:43:00.639 --> 00:43:05.318
GN but then you conduct analysis exactly

00:43:03.119 --> 00:43:07.160
in the same way the only thing that is

00:43:05.318 --> 00:43:09.558
different now is that in the previous

00:43:07.159 --> 00:43:12.159
model we had that the rate of growth the

00:43:09.559 --> 00:43:14.519
stady state rate of growth was equal to

00:43:12.159 --> 00:43:16.480
zero and the state state rate of growth

00:43:14.519 --> 00:43:18.480
of output per person was also equal to

00:43:16.480 --> 00:43:21.280
zero population was not growing output

00:43:18.480 --> 00:43:24.679
was not growing the ratio wasn't growing

00:43:21.280 --> 00:43:28.319
either here is still the case that in a

00:43:24.679 --> 00:43:32.159
steady state output per person is is not

00:43:28.318 --> 00:43:34.920
growing okay but that also means since

00:43:32.159 --> 00:43:38.118
population is growing at the rate GN or

00:43:34.920 --> 00:43:41.079
N I don't know how I call it here H that

00:43:38.119 --> 00:43:44.318
means output must be also growing at the

00:43:41.079 --> 00:43:48.240
rate GN that's what will keep output per

00:43:44.318 --> 00:43:50.679
person not growing okay so so for the

00:43:48.239 --> 00:43:53.439
output itself a very important factor in

00:43:50.679 --> 00:43:55.639
in in in in the in growth is population

00:43:53.440 --> 00:43:57.519
growth and if you look at rates of

00:43:55.639 --> 00:44:00.358
growth in general in the world s

00:43:57.519 --> 00:44:03.000
certainly in the developed World H

00:44:00.358 --> 00:44:04.519
they're falling for a variety of reasons

00:44:03.000 --> 00:44:05.519
and one of them is because population

00:44:04.519 --> 00:44:08.759
growth is

00:44:05.519 --> 00:44:11.239
falling okay but per person that doesn't

00:44:08.760 --> 00:44:14.079
make a difference but but but for the

00:44:11.239 --> 00:44:16.879
level the rate of growth it does and

00:44:14.079 --> 00:44:20.240
then we we added technological progress

00:44:16.880 --> 00:44:23.519
which we model as a effective as

00:44:20.239 --> 00:44:26.199
enhancing labor so having a better

00:44:23.519 --> 00:44:27.920
technology means is as you had more

00:44:26.199 --> 00:44:29.960
workers so for any given level of

00:44:27.920 --> 00:44:33.079
workers having a better technology we

00:44:29.960 --> 00:44:35.400
model it as having more workers okay and

00:44:33.079 --> 00:44:37.200
you can model it exactly that way you

00:44:35.400 --> 00:44:39.680
can use exactly the same diagram we had

00:44:37.199 --> 00:44:41.159
before but now we will divide our

00:44:39.679 --> 00:44:43.000
scaling Factor rather than being one

00:44:41.159 --> 00:44:45.598
over population is going to be one over

00:44:43.000 --> 00:44:47.800
effective population effective workers

00:44:45.599 --> 00:44:49.318
one over again and you conduct exactly

00:44:47.800 --> 00:44:52.960
the same analysis you do exactly the

00:44:49.318 --> 00:44:54.960
same approximations I did before H but

00:44:52.960 --> 00:44:59.159
the difference now is

00:44:54.960 --> 00:45:01.920
that ER is that here you have a rather

00:44:59.159 --> 00:45:06.199
than GN you have

00:45:01.920 --> 00:45:09.079
G why is that well because if I want to

00:45:06.199 --> 00:45:12.239
maintain the capital per effective

00:45:09.079 --> 00:45:13.720
worker constant then I need to First

00:45:12.239 --> 00:45:16.318
make up for the depreciation of the

00:45:13.719 --> 00:45:18.838
stock of capital that's I have to

00:45:16.318 --> 00:45:20.039
stabilize the numerator but then I have

00:45:18.838 --> 00:45:21.599
to take into account that the

00:45:20.039 --> 00:45:23.000
denominator is growing for two reasons

00:45:21.599 --> 00:45:24.760
because population is growing and

00:45:23.000 --> 00:45:26.400
because technology is growing and in

00:45:24.760 --> 00:45:28.960
order to maintain the ratio constant I'm

00:45:26.400 --> 00:45:30.838
going to have to investment so so to

00:45:28.960 --> 00:45:33.519
maintain that ratio constant and that's

00:45:30.838 --> 00:45:36.558
the reason now we

00:45:33.519 --> 00:45:41.679
have this this line here rotates even

00:45:36.559 --> 00:45:41.680
further and we get Delta plus GA plus GN

00:45:42.280 --> 00:45:46.079
okay and you should play with these

00:45:44.159 --> 00:45:50.558
things what happen in this diagram if I

00:45:46.079 --> 00:45:50.559
you know if I increase GA or stuff like

00:45:51.318 --> 00:45:55.800
that and notice that here now still you

00:45:54.199 --> 00:45:57.558
have a steady state but it's a steady

00:45:55.800 --> 00:45:59.839
state in the space of output per

00:45:57.559 --> 00:46:02.760
effective worker in capital per

00:45:59.838 --> 00:46:04.558
effective worker that means for example

00:46:02.760 --> 00:46:07.400
that so that means that these quantities

00:46:04.559 --> 00:46:09.720
are not growing in the stady state but

00:46:07.400 --> 00:46:12.358
output will be growing at which rate in

00:46:09.719 --> 00:46:15.399
the stady state in any state state here

00:46:12.358 --> 00:46:15.400
what is the rate of growth of

00:46:23.880 --> 00:46:28.480
output if output Over N is constant in

00:46:26.880 --> 00:46:31.720
in the today

00:46:28.480 --> 00:46:33.199
State how can that happen output has to

00:46:31.719 --> 00:46:34.318
be growing at which rate at the same

00:46:33.199 --> 00:46:39.239
rate as the

00:46:34.318 --> 00:46:39.239
denominator so it's GA plus

00:46:39.960 --> 00:46:45.639
GN what about that's a tricker question

00:46:43.199 --> 00:46:48.439
what happens to Output per person in

00:46:45.639 --> 00:46:51.759
this stady state what rate is it growing

00:46:48.440 --> 00:46:51.760
at output per

00:46:52.280 --> 00:46:58.519
person sorry somebody said the right

00:46:54.440 --> 00:47:00.480
thing but ga exactly I want to keep this

00:46:58.519 --> 00:47:03.119
ratio constant I'm asking the question

00:47:00.480 --> 00:47:04.599
at which Pace does this need to rise in

00:47:03.119 --> 00:47:08.720
order to maintain this constant well at

00:47:04.599 --> 00:47:08.720
the same rate as a is growing

00:47:09.119 --> 00:47:13.240
good here we also did we asked the

00:47:11.719 --> 00:47:14.838
question well could it be that here if

00:47:13.239 --> 00:47:16.479
we change the saving rate we get some

00:47:14.838 --> 00:47:18.119
extra kick in the long run and the

00:47:16.480 --> 00:47:18.960
answer is no for the same logic as we

00:47:18.119 --> 00:47:21.480
had before you're going to get

00:47:18.960 --> 00:47:22.760
transitional growth but you're

00:47:21.480 --> 00:47:24.199
eventually you're going to convert to a

00:47:22.760 --> 00:47:25.520
stady state and the rate of growth in

00:47:24.199 --> 00:47:27.480
the long run is not going to be a

00:47:25.519 --> 00:47:31.719
function of the saving rate is going to

00:47:27.480 --> 00:47:34.719
be equal to GA plus GN

00:47:31.719 --> 00:47:34.719
okay

00:47:41.679 --> 00:47:46.519
good do here measuring technological

00:47:44.599 --> 00:47:49.519
progress blah blah told you the story of

00:47:46.519 --> 00:47:49.519
China

00:47:50.440 --> 00:47:58.519
good oh we run out of time so let me

00:47:55.358 --> 00:48:00.880
just say the the the last thing uh that

00:47:58.519 --> 00:48:03.039
I want to say so the last thing we

00:48:00.880 --> 00:48:06.000
discussed you say well what happen if

00:48:03.039 --> 00:48:09.800
you add education to this and and try to

00:48:06.000 --> 00:48:11.519
no I make what am I doing yeah I

00:48:09.800 --> 00:48:13.440
expanded the model a little bit I had

00:48:11.519 --> 00:48:16.000
education and said does this change

00:48:13.440 --> 00:48:18.240
conclusions a lot I said no not really I

00:48:16.000 --> 00:48:20.599
mean it it doesn't change the conclusion

00:48:18.239 --> 00:48:22.879
with respect to the long run it affects

00:48:20.599 --> 00:48:24.920
the level of output per capita if you

00:48:22.880 --> 00:48:26.358
have more education but it want a che

00:48:24.920 --> 00:48:29.880
affect the rate of growth in the long

00:48:26.358 --> 00:48:34.400
run and the last point I made is that

00:48:29.880 --> 00:48:36.640
look H in this model if you expand it

00:48:34.400 --> 00:48:38.079
and you try to assume the technology the

00:48:36.639 --> 00:48:39.358
technology is the same and the rate of

00:48:38.079 --> 00:48:41.519
technological progress is the same

00:48:39.358 --> 00:48:43.719
across the world you stick those

00:48:41.519 --> 00:48:46.480
parameters in the mod population growth

00:48:43.719 --> 00:48:48.239
education levels and all that then you

00:48:46.480 --> 00:48:50.119
don't explain the amount of inequality

00:48:48.239 --> 00:48:54.439
we see in the world the world will look

00:48:50.119 --> 00:48:56.200
a lot flatter if if it was just H

00:48:54.440 --> 00:48:57.440
differences in population growth

00:48:56.199 --> 00:48:59.759
depreciation

00:48:57.440 --> 00:49:01.880
education level and things like that but

00:48:59.760 --> 00:49:05.520
with the same technology so if you want

00:49:01.880 --> 00:49:08.440
to account for so this model the

00:49:05.519 --> 00:49:10.400
mod doesn't produce enough

00:49:08.440 --> 00:49:12.519
inequality in the world you need to add

00:49:10.400 --> 00:49:14.280
something else that explains that we

00:49:12.519 --> 00:49:15.480
have some countries in Africa that are

00:49:14.280 --> 00:49:17.680
not growing that they're growing at a

00:49:15.480 --> 00:49:19.358
very low levels rate and we said that

00:49:17.679 --> 00:49:21.759
something else technology for whatever

00:49:19.358 --> 00:49:25.078
reason it happens that there's a pocket

00:49:21.760 --> 00:49:27.480
of countries that that seem to have a

00:49:25.079 --> 00:49:30.519
lower sort of permanently lower level of

00:49:27.480 --> 00:49:32.760
technology and both level and growth

00:49:30.519 --> 00:49:34.679
rate and that's what explains sort of a

00:49:32.760 --> 00:49:36.319
subset of countries that are sort of

00:49:34.679 --> 00:49:38.279
seem stack they are not consistent with

00:49:36.318 --> 00:49:39.440
this convergence type thing so that's

00:49:38.280 --> 00:49:41.319
the reason it's called conditional

00:49:39.440 --> 00:49:43.039
convergence those countries themselves

00:49:41.318 --> 00:49:44.798
are converging to something but they're

00:49:43.039 --> 00:49:47.239
converging to something much lower and

00:49:44.798 --> 00:49:49.480
with much lower rate of growth than most

00:49:47.239 --> 00:49:51.919
of the rest of the world but for the

00:49:49.480 --> 00:49:52.880
final lesson is for the average country

00:49:51.920 --> 00:49:55.639
on

00:49:52.880 --> 00:49:57.680
average it's clear that poorer countries

00:49:55.639 --> 00:49:59.838
grow faster than richer countries that's

00:49:57.679 --> 00:50:01.000
a that's that's a dominant Force but you

00:49:59.838 --> 00:50:03.599
need a little more if you want to

00:50:01.000 --> 00:50:06.599
explain certain pockets of the world

00:50:03.599 --> 00:50:06.599
okay