Productivity Economic Growth Why Productivity Matters GDP Standard

Productivity & Economic Growth Why Productivity Matters!

GDP & Standard of Living • Standard of living depends on a country’s ability to produce goods & services – Real GDP person has ↑ 2 % per year in USA over last 100 years! To ↑ Standard of Living PPF curve must shift right! Productivity per worker must rise!

Productivity • Productivity the amount of output (goods & services) produced from a unit of input (labor, physical capital, etc) – ↑ productivity => ↑ standard of living (rising wealth) Productivity (efficiency) ↑ More goods produced with same resources Standard of Living

Law of Diminishing Returns of Capital As supply of physical capital rises, the extra output produced from an additional unit of physical capital falls. Output per worker 1 An economy has a high level of physical capital, an extra unit leads to a small increase in output Bottom Line: An economy with a low level of physical capital, an extra unit leads to a large increase in output. 1 Physical Capital per worker It is very hard for USA to increase Productivity

Determinants of Productivity • Factors of production determine productivity: • • • Labor Physical capital Human capital Natural resources Technological knowledge USA has led the world in technology/ Internet Are Robotics are future? Led to strong GDP growth in 1980’s & 90’s

GDP & Gov’t Policy • Gov’t policies to raise productivity: – – – Encourage saving & investment Encourage investment from abroad. Encourage education/training Establish property rights & political stability Promote free trade Promote research and development Encourage = PROVIDE INCENTIVES to: • • start new business improve human capital • raise productivity

Real Growth Per Worker GDP Per Worker % (per capita) Growth Rate - -