Productivity Economic Growth Why Productivity Matters Production and

Productivity & Economic Growth Why Productivity Matters!

Production and Growth • 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! Goal is to get PPF curve to shift right!

Productivity • Productivity refers to the amount of output (goods & services) produced from each unit of input (labor, physical capital) – largely determines standard of living Productivity ↑ Standard of Living

Determinants of Productivity • Factors of production determine productivity: • • Physical capital Human capital Natural resources Technological knowledge USA has led the world in technology/ Internet Led directly to Strong GDP growth in 1980’s & 90’s without inflation

Critical Factors for GDP Growth • Property rights – are a prerequisite for a market system to work • Savings & Investment – Gov’t incentives to save & promote business investment (I) • Research & Development: – Most technological advance comes from private research by firms/individual inventors • Educated workforce: – necessary for today’s high technology economy

Diminishing Returns of Capital As the stock of capital rises, the extra output produced from an additional unit of capital falls. Hard for USA To increase Productivity Output per worker 1 2. When the economy has a high level of capital, an extra unit of capital leads to a small increase in output. 1. When the economy has a low level of capital, an extra unit of capital leads to a large increase in output. 1 Capital per worker