47

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

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 ...


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'...


10

Purchasing new homes would count as an investment. According to Blanchard et al. Macroeconomics: a European Perspective pp 568 in glossary investment is defined: Investment (I): Purchases of new houses and apartments by people, and purchases of new capital good (machines and plants) by firms. The source above is the leading undergraduate macroeconomics ...


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

I really think a great place to start in general is Olivier Blanchard's "Macroeconomics". However, this is an economics undergraduate text and may not be optimal for a mathematician, especially given the structure you expect. More to your taste may be the following standard texts: "Introduction to modern economic growth" by Daron Acemoglu. "Recursive ...


5

You seem to be having some misconception how these transfers work Printing money and giving to the poor causes inflation. Increases demand and hikes prices. This is basically certain. This is not generally how government transfers are done. In fact it is very rare to see in practice transfers that are payed by directly printing money. However, if it ...


4

You're correct that just because 1% of the economy is in mineral extraction, doesn't mean that stopping it would reduce global GDP by 1%. Similarly, roughly 10% of global GDP is on energy expenditure, and about the same on food, but if we stopped either of those, global GDP drops to pretty much zero. Do bear in mind that we will stop using coal, oil and gas ...


4

It's not unusual - in many real-world subjects - for there to be questions for which the right answer at one level of learning, under one teaching framework, is the wrong answer in a different context. This is one such question. It will depend as much on what the teaching framework's objectives are, and what its position is within normative economics. As ...


4

Several articles use data sets on this issue but I am not sure that all the data sets are freely available. Valencia & Laeven (2012) use the IMF country reports to create their data set. It covers all IMF member countries since 1970. EDIT: it is available here, as pointed out by @dismalscience. Reinhart and Rogoff (2009) have 70 countries since roughly ...


4

Non-exhaustive list of processes by which value/economic growth/wealth is created: Trade. (Example 1. Robinson has an apple and Friday has a banana. Robinson prefers a banana, while Friday prefers an apple. They trade apple for banana. Both are made better off—value/economic growth/wealth is created.) Trade with division of labor/specialization. (Example 2. ...


4

An answer along macro textbook lines is given by @1muflon1. A shorter answer is as follows. Consider an investor who borrows capital from household (who owns the capital, in growth models) to invest in the firm with production technology $f(k)$. The rate of return $r$ on capital for the household is the interest rate of borrowing for the investor. Each ...


4

In addition to the +1 answer of @KennyLJ which corrects the misconception beteen money and value, let me address the question in your last paragraph directly. Even if we could assume for a sake of the argument that we can manage to perfectly redistribute all income from people and businesses who are still able to operate and produce value (such as netflix, ...


3

There is more than one way to derive the formula for $g_A$ with constant growth: the following is a way I find conceptually simple. Starting from your $g_A=\delta L_A A^{\phi-1}$, differentiate with respect to time (using the product and chain rules) and (for constant growth) set the result to zero: $$\dot{g_A}=0=\delta[A^{\phi-1}\dot{L_A}+L_A(\phi-1)A^{\...


3

As you say the first step is to take log of both sides after that you are just applying the rules for logarithms and rearrange. For example: $$\ln (XZ)=\ln X + \ln Z$$ $$\ln X/Z= \ln X - \ln Z$$ $$\ln X^a = a \ln X$$ $$\ln 1 = 0$$ Also an important approximations that hold close to zero are applied here as well these are: $\ln(1+x) \approx x $ for $x$ ...


3

It is on a correct track but I would not say it is 100% correct as you miss the main source of growth which is technological progress. Consider the following Cobb-Douglas production function with all 4 main factors of production, capital ($K$), human capital ($H$), labor ($L$), land ($M$) then the standard production function would look something like: $$F(...


3

There is a nice review from Petra Moser (NYU) on Patents and Innovation: Evidence from Economic History in the Journal of Economic Perspectives (2013). There is another paper on The Choice between Formal and Informal Intellectual Property: A Review, in the Journal of Economic Literature (2014), where the role of innovation is central.


3

I would also add the following books to the @BBKing list: David Romer. Advanced Macroeconomics - the first three chapters devoted to growth are excellent (but it does not contain much about exchange rates). Nelson Mark. International Macroeconomics and Finance - this is very good book for catching up with the research on exchange rates. It’s quite short ...


3

The elasticity of output with respect to capital will be less than 1 due to the diminishing marginal returns of capital - this is both realistic on macroeconomic scale and also one of the central assumptions of the model. According to Romer’s advanced macroeconomics, pp 12 section 1.2 assumptions: “The intensive-form production function, $f(k)$, is ...


3

This is not proven in Romer but it is a well known result. To derive it mathematically you need to take the following steps: First, the capital as in Romer depreciates so the evolution of capital will be given: $$k_t = k_{t-1} + i_t- \delta k_{t-1} \tag{1}$$ where $k_t$ is the present stock of capital, $k_{t-1}$ previous stock of capital, $i_t$ is ...


3

The question is belied by some basic misconceptions. Just to list a few: The comparison of GDP in nominal terms and implied statements about growth. The definition/measurement of GDP (where saving is apparently not part of GDP). The (completely) arbitrary prices of goods being prescribed for this economy. The meaning of equilibrium. John produces 100kg ...


3

There are different notions of neutrality of technical progress in macroeocnomics. You can have Hicks-neutral technical progress - that is a technical progress that increases the marginal productivity of all factors of production by the same proportion at the same capital-labor ratio. An example of Hicks-neutral production function would be one where $Y^*= ...


3

By the way, after a house is built (whether it was built this year or many years ago) it does provide economic value. If renters live there, then the rent they pay is counted as a service in GDP. And if the home owners live there then the same thing happens, the government estimates the 'imputed rent' and that is counted in GDP.


2

"Definitions-Observation-Lemma-Proof" is not the right perspective for macro, and one will not, and should not, get that in a proper introduction. Start with an undergraduate text, such as Blanchard, for proper economic perspective. (If a macro-economist wants a beginner's reference on algebraic geometry, one would recommend an undergraduate text, not ...


2

Some great answers miss your point because they focus on indexes, whereas you are asking simply about the market value of the x largest companies relative to gdp, if there is a limit. Indices are plagued with selection bias, survivorship bias, dividend reinvestment, acquisitions. My humble opinion is that barring companies owning the shares of other public ...


2

Considering GDP reflects the material means of living that a nation could achieve, this definition could be a little reductionist but works for answering your question (see materials means of living as every thing that all human could use in his life and has had to been produced). Now population always grows, and the more people there are in the world the ...


2

Yes but note economic development is more broad than just GDP. GDP measures economic output of a country and higher GDP correlates with higher development and it can be also used as a measure of economic development but more narrowly GDP is just a measure of output. This is correct, GDP can’t measure things like home production. It’s a disadvantage of GDP ...


2

Yes, for any A and B $$ \text{A}\cdot(g+n) + \text{B}\cdot(g+n) = \text{(A+B)}\cdot(g+n) $$ does indeed hold.


2

Smith pointed out that as wealth was growing in any nation, the rate of profit would tend to fall and investment opportunities would diminish. Source The first half of the sentence makes it clear that this is not about steady state economies, as wealth is still growing. my question can be rephrased in a simpler way: If the economy was/became a ...


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