48

Trade creates value. Previously, Kate preferred spending \$50 on food at Alice's restaurant (rather than cook her own food). And Alice preferred spending \$50 getting her hair cut at Kate's (rather than cut her own hair). That Kate must now cook her own food and Alice cut her own hair means that value has fallen (where value is broadly defined as the degree ...


19

I find your question very interesting. The metric of median household income is also used by others to argue the presence of income inequality: https://en.wikipedia.org/wiki/Income_inequality_in_the_United_States#Causes However, it seems that it is not only the median but also the mean that stagnates: (I used family instead of household income because I ...


18

Both Alice and Kate have bills to pay, regardless of whether they are earning money or not. Restaurants and salons have to pay rent and maintenance on their properties whether they are in business or not. They both need to feed themselves and possibly their families whether they earn income or not. They need electricity and water and other utilities in ...


14

This is when the attempt at accuracy creates confusion and misunderstanding. Back in the day, growth models were not incorporating technological progress, and led to a long-run equilibrium characterized by constant per capita magnitudes. Verbally, the term "steady-state" seemed appropriate to describe such a situation. Then Romer and endogenous growth ...


13

Trade is good because it creates efficiency. Alice has invested in her kitchen and knows the supply chain of ingredients, and due to the efficiency of her business, she can sell a meal for $50. If Kate wants to cook the same meal, she'll have to buy all the necessary equipment and ingredients, and spend time learning cooking techniques, and by the end, she'...


12

"Worth less" than before - yes, that's exactly what inflation does. "Worthless" - not quite. No percentage-based reduction in value can make something worth 0, but there are extreme examples from history of times inflation has spiralled so far out of control ("hyperinflation"), money became worth less than the paper it was printed on, and life savings ...


11

I will toot my own horn and cite - Phillips and Wrase. (2006) "Is Schumpeterian ‘Creative Destruction’ a Plausible Source of Endogenous Real Business Cycle Shocks?," Journal of Economic Dynamics and Control, vol. 30 no. 11 pp. 1885-1913. We found it difficult to match the volatility using Schumpterian mechanisms alone. The business cycle asymmetries from ...


11

The transversality condition may be more easily understood if we start from a problem with finite horizon. In the standard version, our objective is to $$ \max_{\{c_t,k_{t+1}\}_{t=0}^T} \sum_{t=0}^T\beta^t u(c_t) $$ subject to $$ \begin{aligned} f(k_t)-c_t-k_{t+1}&\ge0,\quad t=0,\dots,T &&\text{(resource/budget constraint)}\\ c_t,k_{t+1}&\...


10

The Business Dynamics Statistics (BDS) of the Census provides annual measures of business dynamics (such as job creation and destruction, establishment births and deaths, and firm startups and shutdowns) for the economy and aggregated by establishment and firm characteristics. The use of the LBD as its source data permits tracking establishments and firms ...


9

I understand that you are asking the following Up to now, we have avoided structural unemployment because we increased production by more than what the technological efficiency gains implied (and so eventually re-employed the labor that had become initially obsolete, usually in other industries). But if finite resources put constraints on how much ...


9

There have been examples of some papers that incorporate these ideas. They are typically housed within the endogenous growth literature. Off the top of my head, these are the papers that I think of: "Endogenous Growth And Endogenous Business Cycles" by Sergui and Lilia Maliar. I haven't read this paper in awhile, but if I remember correctly, the idea is ...


9

I believe the problem is that the steady state may not exist, and the system instead exhibits steady growth (depending on parameters). The reason is because the model is equivalent to the standard consumption-saving problem with exogenous and constant interest rate. To see that, first consider the first order condition for labor choice $f_2(k,\ell) = w$ (...


9

Growth as is meant here "must" be nothing in particular. It is a specific metric, the percentage change in yearly GNP/GDP, and it is what it is. In Blanchard and Fischer 's "Lectures on Macroeconomics", in the introductory chapter 1, page 2, Figure 1.1, the logarithm of USA GNP 1874-1986 is graphed: and it is impressively linear , bar a disturbance around ...


8

The two statement say two completely different things. So, no, there is no contradiction. The second welfare theorem essentially says that a system of transfers that results in an efficient allocation can be supported by a competitive outcome. The statement about replacing income taxes with a consumption tax will increase peoples' incentives to save. These ...


7

Because linear functions don't match the data. You can't express a series $$[1,2,4,9,16]$$ as $$f(x)=x+y$$ for any possible $y$.


7

One argument brought forward (it is a generalization/argument for lack of infrastructures) is the Acemoglu-Robinson hypothesis of extractive versus inclusive institutions. Long-story short: some institutions are good for (long term) growth ("inclusive"), and some are good for short-term extraction of resources ("extractive"). Depending on whether the elites ...


7

GDP is a measure of economic activity. One typical way to look at the question is the way shown in another answer. Here I want to put some assumptions in place in order to give a bit more structure. It is widely accepted that economic output is created through capital and labor, and facilitated by technology. For the sake of answering this question, we can ...


7

Usually GDP growth rates are publicly talked about in real terms but not per capita, see for example World Bank where, above the relevant table we read Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2005 U.S. dollars. GDP is the sum of gross value added by all resident producers ...


7

There are trends that has allowed stock markets in advanced economies to grow faster than GDP for a long time: Branching out abroad. This gives access to faster growing markets in developing countries. This trend will end when all countries are advanced economies. Fewer private companies. This trend will end when most of GDP is generated by companies listed ...


7

Most people aren't Alice and Kate. GDP is a measure of the total goods and services produced within an economy. The point is measuring total production, not measuring how much money is changing hands. There are a couple of things going on here: In the example you mention of Alice and Kate, there is presumably some reason why they were paying each other ...


7

Let's consider another example. I'm an automotive manufacturing service engineer; I build and repair machines that are used to build and repair cars. I use the money I earn to buy a variety of things, including, say, gasoline. Of course, if all of the automotive manufacturing service engineers stop working, that's no big deal. People can just build their ...


6

Macro regressions, especially annual ones, have in general two flaws: They have small sample problems and They have no proper identification In order to circumvent problem #1, people often assume that the DGP process behind different countries are the same, increasing observations from perhaps 60 to 600. In order to attack #2, many people add timing ...


6

Because we use today's capital stock to produce tomorrow's output, some fraction of which is invested, so you should expect something like $dK/dt=\alpha f(K)$ where $f$ is increasing in $K$.


6

Limiting the scope to the question of why the US encouraged the proliferation of many banks, one important contributor was the 1927 McFadden act, which placed significant restrictions on interstate banking (rolled back through state laws in the 1980s-90s, and eventually substantially repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act ...


6

I am posting this as an answer, because it continues on user @ivansml answer... which is the one that identified the catch here, a catch I naively have overlooked (although it is a narrow case, while the interesting par comes after. Nevertheless, it should have been dealt with). Indeed, with exogenous wage rate, and perfectly competitive optimization on ...


6

Roughly, people produce "stuff" by spending their time working (labour) and by employing machinery/tools/land/etc. (capital). If you have more workers or more machinery then it should not come as a surprise that more goods and services get produced. But this is only part of the story. Even if we divide by the number of people to get the size of the economy ...


6

I suppose that it depends on the time scale you are considering. Over the very long run the poor seem to have benefited far more than the rich from growth. See for example Robert J. Samuelson in the Washington Post: By 1915, the United States was the world’s richest nation — and yet, most Americans were dirt poor by today’s standards. Adjusted for ...


6

In my opinion, the best derivation is by logic. Think about it this way: If the only thing we are telling the household is to maximize its utility, optimal behaviour would then be just making infinite debt and consume infinitely. This is no sensible solution. We therefore need another optimality condition. This should answer question 2. In a finite horizon ...


6

There is a large literature considering the depletion of natural resources, including fossil fuels, in relation to GDP. Some writers explicitly refer to such resources as a kind of natural capital. Others may refer to natural resource assets, or simply to natural resources. A key question within this literature is whether depletion of natural resources ...


6

There's a bit to unpack here. Consistent wage growth seems in line with rising GDP. So does a steadily falling unemployment rate. For other economic measures, the stock market is a whole other animal. It often responds to outside global events that aren't solely economic in nature. It may also be affected by the Federal Reserve's desire to steadily ...


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