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Fundamental Concepts of Macroeconomics

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Economics for Environmental Studies

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Abstract

Macroeconomics deals, inter alia, with the problems of unemployment, of price instability and of stagnation (or even underdevelopment). It is argued in Sect. 9.1 that for environmental studies the problem of stagnation and the corresponding goal of economic growth are of main interest, while unemployment and price instability are to a lesser extent. Hence, Sect. 9.2 focuses on basic concepts and models of growth theory. It is demonstrated that the growth of a country’s flow of income is based on this country’s stock of wealth. Any growth in the flow of income requires investments in the productive stocks available. In neoclassical growth theory, the feasibility of unbounded growth via investment activities is postulated. For practical purposes, the abstract notion of «economic growth» has to be operationalised. The most common indicator of economic growth is the real gross domestic product (GDPr). Therefore, in Sect. 9.3 it is outlined how the GDPr is computed within the United Nations’ System of National Accounts (SNA). Furthermore, the procedure used in the SNA to account for the stock of national wealth is sketched.

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Notes

  1. 1.

    For a recent introductory exposition of the topic of unemployment , see Mankiw (2016, Ch. 7).

  2. 2.

    See Okun (1962) for the original work and Harms (2016, pp. 431–2) for a contemporary appreciation .

  3. 3.

    See (Phillips 1958), Samuelson and Solow (1960) and Blanchard (2017, Ch. 8).

  4. 4.

    We promise to specify this in 7 Sect. 9.3, below.

  5. 5.

    Here it becomes obvious that every line drawn between microeconomics and macroeconomics must be somewhat arbitrary. On the one hand, aggregation of different commodities and services to a one-dimensional measure of «consumption» is common as well in microeconomic models. See, for example, analyses of a household’s intertemporal consumption decision, where aggregate consumption in different periods of time is used (see Varian 2014, Ch. 10). On the other hand, a continuum of different consumption goods is considered in macroeconomic models that claim to rest on a «microeconomic foundation» (see Galí 2015, Ch. 3).

  6. 6.

    This represents the «very long-run perspective» of macroeconomics (see Mankiw 2016, Part III), which is of particular interest with reference to environmental consequences of human activity.

  7. 7.

    See Mankiw (2016, Ch. 5) on the causes of inflation and Galí (2015) for a New-Keynesian exposition of inflation and monetary policy.

  8. 8.

    These problems are addressed within «short-run macroeconomics» (see Mankiw 2016, Part IV) that concerns the field of resource economics to a lesser extent than the long-run issue of economic growth and development.

  9. 9.

    For a detailed analysis of growth models set up in continuous time, see, for example, Barro and Sala-i-Martin (2004).

  10. 10.

    See 7 https://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html, accessed 25 August 2016.

  11. 11.

    For example, the World Bank claims that «growth is the most critical factor in alleviating poverty» (World Bank, 7 http://einstitute.worldbank.org/ei/course/policies-growth, Accessed 31 May 2015). «Economic growth is central to economic development. When national income grows, real people benefit» (World Bank, 7 http://data.worldbank.org/topic/economy-and-growth, Accessed 31 May 2015).

  12. 12.

    Phelps (1961).

  13. 13.

    The original contributions are Solow (1956) and Swan (1956). For alternative textbook expositions of the Solow model (frequently called the Solow-Swan model as well) see Barro and Sala-i-Martin (2004, pp. 23–84) and Jones and Vollrath (2013, pp. 20–53).

  14. 14.

    In 7 Sect. 9.2.4.5, below, we shall provide more reasoning on this assumption.

  15. 15.

    See 7 Sect. 9.3, below, for nature and computation of such a measure.

  16. 16.

    See footnote 32 in 7 Sect. 6.3 as well.

  17. 17.

    As a synonym for «constant returns to scale», often the term «linear homogeneity» is used.

  18. 18.

    See further details on this assumption in 7 Sect. 9.2.4.5, below.

  19. 19.

    This corresponds to the definition of a steady state suggested in Barro and Sala-i-Martin (2004, pp. 33–4). Sometimes the term «balanced growth» is exactly assigned to our definition given in the text and is used as a broader term, while the term «steady state» is interpreted as a special case of a balanced growth path where variables grow at zero rates (ibid., p. 34).

  20. 20.

    See Barro and Sala-i-Martin (2004, p. 31 and footnote 13 on p. 34) for the properties of the per capita production function that ensure existence and uniqueness of the steady state in the Solow model.

  21. 21.

    For a proof, see Barro and Sala-i-Martin (2004, pp. 28–9).

  22. 22.

    For more details on the transitional dynamics in the Solow model, see Barro and Sala-i-Martin (2004, pp. 37–40).

  23. 23.

    This model was elaborated in detail by Cass (1965) and Koopmans (1965). Their starting point was the pioneering work of Ramsey (1928). Therefore, the model is often labelled the «Ramsey-Cass-Koopmans model» as well.

  24. 24.

    In advanced theroretical models, the assumption of perfect foresight is dropped and decision-making under risk and uncertainty is analysed (see, e.g., Pindyck and Rubinfeld 2015, Ch. 5).

  25. 25.

    This assumption is made in order to keep things as overseeable as possible. In somewhat more complicated versions of the Ramsey model, labour supply is represented as a function of the real wage rate (see, e.g., Barro and Sala-i-Martin 2004, pp. 422–428).

  26. 26.

    There are more «realistic» models of overlapping generations (OLG) where each consumer lives for two periods only. However, if mortal consumers are altruistic with regard to their descendants, these models deliver very similar conclusions to those drawn from the model of infinitely living consumers (see, e.g., Barro and Sala-i-Martin 2004, pp. 190–200).

  27. 27.

    Because the time horizon is infinite, we have to assume that the sum in Eq. (9.16) converges to a finite value.

  28. 28.

    Whether the consumer will be able to realise his plan in period t is a question that will be explored below in 7 Sect. 9.2.4.5, where we shall investigate a dynamic general equilibrium in the Ramsey model.

  29. 29.

    This is, in fact, not the only restriction, see, e.g., Harms (2016), pp. 105–6.

  30. 30.

    Leonhard Euler (1707–1783) was a Swiss mathematician and physicist who provided many insights that are useful to the present in economic theory as well as in other disciplines of science.

  31. 31.

    This can be shown for many specifications of the periodical utility function u(c t ) fulfilling the assumptions of positive but diminishing marginal utility, but not for all.

  32. 32.

    A maybe more realistic approach would be to assume that firms own a certain stock of capital. Purchases of capital could be financed out of emissions of equity shares. Consumers as buyers of those equity shares would have a claim on firms’ cash flows (see Barro and Sala-i-Martin 2004, pp. 152–155). However, the price to be paid for this gain in terms of realism is a rise of the complexity of the model that does not seem to be appropriate for our purposes.

  33. 33.

    Static profit maximisation was already explained in 7 Sect. 6.3.

  34. 34.

    For example, if n = 0.025 and β = 0.05, n β = 0.00125.

  35. 35.

    For example, if we assume a Cobb-Douglas technology F(K, N) = K 0.5 N 0.5, marginal product of capital is F K = 0.5 K −0.5 N 0.5. The per capita production function is f(k) = (K 0.5 N 0.5)/N = k 0.5 and f ´(k) = 0.5 k −0.5. Hence, F K = f ´.

  36. 36.

    For this assumption, see e.g., Barro and Sala-i-Martin (2004, pp. 98–99). There is an important branch of economic theory that criticises and rejects the figure of a «benevolent social planner». This branch is called «Public Choice» (see the same-named journal for recent developments). In the Public-Choice literature, social planners –«politicians»– are assumed to pursue own individual self-interests to the disadvantage of the public.

  37. 37.

    See Barro and Sala-i-Martin (2004, pp. 98–99) for this conclusion in a continuous-time framework.

  38. 38.

    See, e.g., Barro and Sala-i-Martin (2004, pp. 53–4); Jones and Vollrath (2013, p. 37).

  39. 39.

    If technological progress is not labour-augmenting (but, e.g., capital-augmenting in the sense that Q = F(AK, N)), a steady state is non-existent (see Barro and Sala-i-Martin 2004, p. 53, and, for a proof, ibid., pp. 78–80).

  40. 40.

    We neglect products of the variables n, μ, and β since these are «very» small if n, μ, and β are small numbers.

  41. 41.

    For an overview see Barro and Sala-i-Martin (2004), Chaps. 4–7.

  42. 42.

    Already Hicks (1946) analysed the incentives to strive for technological progress generated in a market system by relative prices and their changes. The broader term of «induced technological change» covers, besides market incentives, further incentives set by governments.

  43. 43.

    See Jones and Vollrath (2013, pp. 79–119) for a more detailed textbook adaption of Romer’s model.

  44. 44.

    As an example, the European Union’s member countries conduct national accounting in line with the European system of accounts «ESA 2010» that builds upon the United Nations’ SNA 2008 (see Eurostat 2013).

  45. 45.

    «An institutional unit is said to be resident within the economic territory of a country when it maintains a centre of predominant economic interest in that territory, that is, when it engages, or intends to engage, in economic activities or transactions on a significant scale either indefinitely or over a long period of time, usually interpreted as 1 year» (UN et al. 2009, pp. 7–8).

  46. 46.

    The present subsection is based on UN et al. (2009), pp. 195–269.

  47. 47.

    The institutional units taken into consideration are non-financial corporations (like producers of automobiles), financial corporations (like banks), the general government, households and non-profit institutions serving households (NPISHs, e.g., non-governmental charitable institutions like the Red Cross).

  48. 48.

    For more detail on the following, see UN et al. (2009), pp. 205–15.

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Authors and Affiliations

  1. University of Hagen, Hagen, Germany

    Alfred Endres

  2. Baden-Württemberg Cooperative, State University Ravensburg, Ravensburg, Germany

    Volker Radke

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Endres, A., Radke, V. (2018). Fundamental Concepts of Macroeconomics. In: Economics for Environmental Studies. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-54828-8_9

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