Production and Growth Chapter 25 2020918 IN THIS

Production and Growth Chapter 25 2020/9/18

IN THIS CHAPTER YOU WILL. . . 1. See how economic growth differs around the world 2. Consider why productivity is the key deter minant of a country’s standard of living 3. Analyze the factors that determine a coun try’s productivity 4. Examine how a country’s policies influence its productivity growth 9/18/2020 Teacher: gulnur yusup

Production and Growth u. A country’s standard of living depends on its ability to produce goods and services. u. Within a country there are large changes in the standard of living over time. u. In the United States over the past century, average income as measured by real GDP person has grown by about 2 percent per year. 9/18/2020 Teacher: gulnur yusup

Production and Growth u Productivity refers to the amount of goods and services produced for each hour of a worker’s time. u A nation’s standard of living is determined by the productivity of its workers. 9/18/2020 Teacher: gulnur yusup

Economic Growth Around the World u. Living standards, as measured by real GDP person, vary significantly among nations. u. The poorest countries have average levels of income that have not been seen in the United States for many decades. 9/18/2020 Teacher: gulnur yusup

Table 1 The Variety of Growth Experiences

The data on real GDP person show that living standards vary widely from country to country. Income person in the United States, for instance, is about 8 times that in China and about 15 times that in India. 9/18/2020 Teacher: gulnur yusup

Economic Growth Around the World Because of differences in growth rates, the ranking of countries by income changes substantially over time. 9/18/2020 Teacher: gulnur yusup

Compounding and the Rule of 70 u Annual growth rates that seem small become large when compounded for many years. u Compounding refers to the accumulation of a growth rate over a period of time. 9/18/2020 Teacher: gulnur yusup

Compounding and the Rule of 70 According to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately 70/x years. 9/18/2020 Teacher: gulnur yusup

An Example of the Rule of 70 u$5, 000 invested at 7 percent interest per year, will double in size in 10 years 70/ 7 = 10 9/18/2020 Teacher: gulnur yusup

WHY PRODUCTIVITY IS SO IMPORTANT A nation can enjoy a high standard of living only if it can produce a large quantity of goods and services. u Americans live better than Nigerians because American workers are more productive than Nigerian workers. u The Japanese have enjoyed more rapid growth in living standards than Argentineans because Japanese workers have experienced more rapidly growing productivity. u 9/18/2020 Teacher: gulnur yusup

How Productivity is Determined u The inputs used to produce goods and services are called the factors of production. u The factors of production directly determine productivity. 9/18/2020 Teacher: gulnur yusup

Physical Capital Workers are more productive if they have tools with which to work. The stock of equipment and structures that are used to produce goods and services is called physical capital, or just capital. 9/18/2020 Teacher: gulnur yusup

Human Capital A second determinant of productivity is human capital. Human capital is the economist’s term for the knowledge and skills that workers acquire through education, training, and experience. 9/18/2020 Teacher: gulnur yusup

Natural Resources A third determinant of productivity is natural resources. Natural resources are inputs into production that are provided by nature, such as land, rivers, and mineral deposits. Natural resources take two forms: renewable and nonrenewable. 9/18/2020 Teacher: gulnur yusup

Technological Knowledge A fourth determinant of productivity is technological knowledge—the understanding of the best ways to produce goods and services. 9/18/2020 Teacher: gulnur yusup

Government Policies That Raise Productivity and Living Standards u Encourage saving and investment. u Encourage investment from abroad u Encourage education and training. u Establish secure property rights and maintain political stability. 9/18/2020 Teacher: gulnur yusup

Government Policies That Raise Productivity and Living Standards u Promote free trade. u Control population growth. u Promote research and development. 9/18/2020 Teacher: gulnur yusup

The Importance of Saving and Investment There is definitely a link between investment today and growth in the future. 9/18/2020 Teacher: gulnur yusup

Growth and Investment (a) Growth Rate 1960 -1991 South Korea Singapore Japan Israel Canada Brazil West Germany Mexico United Kingdom Nigeria United States India Bangladesh Chile Rwanda 0 (b) Investment 1960 -1991 South Korea Singapore Japan Israel Canada Brazil West Germany Mexico United Kingdom Nigeria United States India Bangladesh Chile Rwanda 1 2 3 4 5 6 0 7 Growth Rate (percent) 10 20 30 40 Investment (percent of GDP) 9/18/2020 Teacher: gulnur yusup

The Importance of Saving and Investment As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns. u Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while. u Thus small countries can grow faster than big countries. u 9/18/2020 Teacher: gulnur yusup

The Importance of Saving and Investment u. The catch-up effect refers to the condition that, other things being equal, it is easier for a country to grow fast if it starts out relatively poor. u. Once the country becomes richer, diminishing returns sets in. 9/18/2020 Teacher: gulnur yusup

Investment from Abroad Investment from abroad takes several forms: u. Foreign Direct Investment u Capital investment owned and operated by a foreign entity. u. Foreign Portfolio Investment u Investments financed with foreign money but operated by domestic residents. 9/18/2020 Teacher: gulnur yusup

Education u For a country’s long-run growth, education is at least as important as investment in physical capital. ä Human Capital u In the United States, each year of schooling raises a person’s wage on average by about 10 percent. u Thus, one way the government can enhance the standard of living is to provide schools. 9/18/2020 Teacher: gulnur yusup

Property Rights and Political Stability u Property rights refer to the ability of people to exercise authority over the resources they own. u An economy-wide respect for property rights is an important prerequisite for the price system to work. u It is necessary for investors to feel that their investments are secure. 9/18/2020 Teacher: gulnur yusup

Free Trade is, in some ways, a type of technology. u A country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance. u Remember globalization? u 9/18/2020 Teacher: gulnur yusup

Control of Population Growth u Population is a key determinant of a country’s labor force. Large populations tend to produce greater total GDP. u However, GDP person is a better measure of economic well-being, and high population growth reduces GDP person. u Thomas Malthus theory of population growth and economic well-being. u 9/18/2020 Teacher: gulnur yusup

Research and Development, Epilogue u The advance of technological knowledge has led to higher standards of living. Most technological advance comes from private research by firms and individual inventors. u Government can encourage the development of new technologies through research grants, tax breaks, and the patent system. u u There are pros and cons to productivity gains though, show Solman DVD video on productivity. 9/18/2020 Teacher: gulnur yusup

Productivity and Bathrooms u u u This is a tale of the selfcleaning bathroom. Think about what productivity means in terms of goods and services, jobs and wages. Journal Question-Can you think other examples where there was a major innovation that has impacted jobs? 9/18/2020 Teacher: gulnur yusup