Future macroeconomic environment and its expected impact on management . The role of technology

Chandraketu tripathi

Agenda

• What is a Macroeconomic policy• Top 5 world economies in 2050• The Macro Environment Analysis• Pest analysis and Pestle analysis• What is EXOGENOUS and ENDOGENOUS change• Solow–Swan model• The Green Solow Model and the Environmental Kunetz Curve• Discuss about Exogenous technology growth• Knowledge Spillovers

The Future Macroeconomic environment**

Both forms of policy are used to stabilize the economy, which usually means boosting the economy to the level of GDP consistent with full employmentCentral banks implement monetary policy by controlling the money supply through several mechanisms.Fiscal policy is the use of government's revenue and expenditure as instruments to influence the economy. Examples of such tools are expenditure, taxes, debt.

 

The Macroeconomic policy

FISCAL MONETARY

The HSBC report 2050 Report takes in to account Barro’s model:-

Barro (1991) argues diminishing returns are real and in fact rich countries grow slower than poor countries.

The first set of variables for driving growth is Human Capital, Health & education.

Second set of variables is fixed capital investment to equip workers with tools and technology.

These variables set are rules of law, government interference, democracy and monetary control.

Key HSBC Report observations:

The Global growth :

Size of Economy (Year 2000 dollars): $3.7 trillionIncome per capita (Year 2000 dollars): $52,683

Detail: Germany's economy will remain the largest in Europe, out-producing the U.K. even though the two nations will have virtually the same population size. However, the number of people living in Germany is expected to tumble by 24% as the U.K. grows.Source: HSBC

#5: Germany

Size of Economy (Year 2000 dollars): $6.4 trillionIncome per capita (Year 2000 dollars): $63,244Detail: Japan's population will decline markedly over the next 50 years, but its economy will still grow by $1.4 trillion. Together, income per capita will rise ever higher — ranking fourth in the world.Source: HSBC

#4: Japan

Size of Economy (Year 2000 dollars): $8.1 trillionIncome per capita (Year 2000 dollars): $5,060Detail: India's economy will have skyrocketed by 2050, growing from $960 billion to more than $8 trillion. The country will also add 400 million more people to its population over the next half century.Source: HSBC

#3: India

Size of Economy (Year 2000 dollars): $22.3 trillionIncome per capita (Year 2000 dollars): $55,134Detail: Even though the U.S. is no longer number one, the size of its economy will have doubled while adding roughly 90 million people to its population.Source: HSBC

#2: United States of America

Size of Economy (Year 2000 dollars): $25.3 trillionIncome per capita (Year 2000 dollars): $17,759Detail: HSBC predicts that China will overtake the U.S. in size sometime over the next 50 years as its population surges to 1.43 billion. Even with the increase, its income per capita will remain outside the top 50 nations.Source: HSBC

#1: China

The World Economies in 2050

The Economies in 2025,2040

Various Reports at a glance:

World Economies classified

The PWC Report

The Macro Environment Analysis(comprises) :

Economic Trends: The macro economic environment analysis will identify trends such as changes in personal disposable income, interest rates, inflation and unemployment rates.

Political Trends: The macro political environment analysis will identify changes in the position politicians take on issues. A current example is a shift towards greener policies in the developed world.

Technological Trends: The macro technological environment analysis will identify changes in the application of technology. A current example is a shift towards online transactions and in some areas a shift away from online transactions.

Legal Trends: The macro legal environment analysis is closely linked to the political environment (politicians tend to make the laws), but also includes trends in court decisions – such as liability compensation.

Social/Cultural Trends: The macro social/cultural environment analysis will identify trends in societies beliefs, behaviors, values and norms. Such as the number of part time workers, attitudes towards global warming, make up of the family structure.

Demographic Trends: The macro demographic analysis will identify trends in population growth at relevant ages for your industry (There maybe zero population growth in general but high growth in the number of people over 65), the population location.

Pest analysis and Pestle analysisThe P.E.S.T. analysis is the same as the macro environment analysis but used the acronym P.E.S.T. • Political• Economic• Social/cultural• Technological

And the P.E.S.T.L.E Analysis• Political• Economic• Social/cultural• Technological• Legal• Environmental (Environmental issues, global warming, pollution etc)

The EXOGENOUS (originating from outside; derived externally) and ENDOGENOUS(Dependent) trends

An Exogenous change is one that comes from outside the model and is unexplained by the model. For example, in the simple supply and demand model, a change in consumer tastes or preferences is unexplained by the model.

In supply and demand model, when predicting the quantity demanded in equilibrium, the price is endogenous because producers change their price in response to demand and consumers change their demand in response to price. In this case, the price variable is said to have total endogeneity once the demand and supply curves are known.

The Exogenous growth grew out of the neoclassical growth model and the works contributed by Robert Solow. The exogenous growth model factors in production, diminishing returns of capital and technological variables to determine economic growth.

Exogenous growth assumes that economic prosperity is primarily determined by external rather than internal factors. According to this belief, given a fixed amount of labor and static technology, economic growth will cease at some point, as ongoing production reaches a state of equilibrium based on internal demand factors.

The neoclassical growth model of Robert SolowSolow–Swan model Neo-classical model was an extension to the 1946 Harrod–Domar model that included a new term: productivity growth

The Solow–Swan model is an exogenous growth model, an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress.

At its core is a neoclassical aggregate production function, usually of a Cobb–Douglas type{ Cobb–Douglas production function is a particular functional form of the production function, widely used to represent the technological relationship between the amounts of two or more inputs, particularly physical capital and labor, and the amount of output that can be produced by those inputs.

where:• Y = total production (the real value of all goods produced in a year)• L = labor input (the total number of person-hours worked in a year)• K = capital input (the real value of all machinery, equipment, and buildings)• A = total factor productivity• α and β are the output elasticities of capital and labor, respectively. These values are constants determined by

available technology.}, which enables the model “to make contact with microeconomics”.

The Ramsey Model (Ramsey–Cass–Koopmans model)

Introduces endogenous savings/consumption decision

Optimal consumptionThe decentralized equilibrium can be compared with the Pareto efficient equilibrium

The Solow model:The first general equilibrium model with production side.It is empirically testable.Lacks micro foundations (saving is not determined exogenously)Exogenous technological progress explains all.

The decentralized modelTwo agentsHouseholds. maximize their life-time utility subject to an intertemporalbudget constraintFirms: maximize profits subject to their factor accumulation constraintGeneral Equilibrium. Demand=Supply.

The Social Planner modelThe social planner maximizes the house holds utility subject toaggregate resource constraint of the economy.

If the decentralized solution coincide with the Social Planner solution,then the outcome is Pareto optimal.(Describing a situation in which the profit of one party cannot be increased without reducing the profit of another)

The higher rate , the more willing households are to save and shift consumption in the future.The higher the rate of return to consumption is, the more willing households are to sacrifice future consumption for more current consumption and thereby less current saving.

Ramsey Model

The Green Solow Model and the Environmental Kunetz Curve

Environmental Kunetz Curve (EKC): is a hump shaped relationship between environmental degradation and per capita income. At low level of economic activity, the environment is worsening. As the economic activity increases environmental degradation peacks. Then,as a country becomes richer and richer, environmental degradationbegins to fall.

In the short run, growth is determined by moving to the new steady state which is created only from the change in the capital investment, labor force growth and depreciation rate. The change in the capital investment is from the change in the savings rate.In the long run, the standard Solow model predicts that in the long run, growth will be equal to the new steady state.

Mankiw–Romer–Weil version of model

N. Gregory Mankiw, David Romer, and David Weil created a human capital augmented version of the Solow-Swan model that can explain the failure of international investment to flow to poor countries.

In this model, output and the marginal product of capital (K) are lower in poor countries because they have less human capital than rich countries.

Exogenous technology growth

• Solow (and Swan) models show that technological change drives growth• But growth of technology is not determined within the model (it is exogenous)• In words …. better technology raises output, but also creates new capital

investment opportunities• Endogenous growth models try to make endogenous the driving force(s) of

growth• Can be technology or other factors like learning by workers• Neoclassical model Countries produce and consume one single good (units of

GDP); There is no international trade (since there is only one good) Technology is exogenous Perfect competition in all markets

Neil Harbisson Cyborg ("cybernetic organism") 

Since the Growth of technology via ‘knowledge spill overs’ are vital for economic growth.

Competitive profit-seeking firms can generate investment & growth, but can be market failures.

The Endogenous growth models imply greater competition, lower profits, lower incentive to do R&D and lower growth. Knowledge spillovers are non-rival

knowledge market costs incurred by a party not agreeing to assume the costs that has a spillover effect of stimulating technological improvements in a neighbor through one's own innovation.

Vital technology growth Spill over effect

The world awaits 2050

Ward k (2011) The world in 2050 HSBC global research,

Technology Quarterly The economist Dec 11 2010

Macro economic reports by The Economist

Blanchard, Olivier (2011). Macroeconomics Updated (5th ed.). Englewood Cliffs: Prentice Hall.

Dwivedi, D.N. (2001). Macroeconomics : theory and policy. New Delhi: Tata McGraw-Hill. ISBN

C. Freeman;From The New Palgrave Dictionary of Economics, Second Edition, 2008

Mankiw, N. Gregory (2014), Principles of Economics, Cengage Learning,

Healey, Nigel M. (2002). "AD-AS model". In Snowdon, Brian; Vane, Howard. An Encyclopedia of Macroeconomics. Northhampton, Massachusetts: Edward Elgar Publishing. pp. 11–18.

Durlauf, Steven N.; Hester, Donald D. (2008). "IS–LM". In Durlauf, Lawrence E.; Blume. The New Palgrave Dictionary of Economics (Second ed.). Palgrave Macmillan. doi:10.1057/9780230226203.0855.

Neely, Christopher J. "Okun's Law: Output and Unemployment. Economic Synopses. Number 4. 2010.) Ramsey, Frank P. (1928). "A Mathematical Theory of Saving". Economic Journal 38 (152): 543–559. Cass, David (1965). "Optimum Growth in an Aggregative Model of Capital Accumulation". Review of Economic Studies 32 (3): 233–240.Koopmans, T. C. (1965). "On the Concept of Optimal Economic Growth". The Economic Approach to Development Planning. Chicago: Rand McNally. pp. 225–287.

References