Econ 105 Macroeconomics: Chapter 7

Look at the slides, lots of info that there is to study

PRODUCTIVITY

the quantity of goods and services produced from each hour of a worker’s time.

Why is productivity important?

• determinant of living standards

• Growth = growth in living standards

• to enjoy a high standard of living, a country must produce a large quantity of goods and services

Determinants of productivity:

▪ Physical capital per worker ▪ Human capital per worker ▪ Natural resources per worker ▪ Technological knowledge

PHYSICAL CAPITAL

he stock of equipment and structures that are used to produce goods and services

HUMAN CAPITAL

the knowledge and skills that workers acquire through education, training, and experience

NATURAL RESOURCES

the inputs into the production of goods and services that are produced by nature, such as land, rivers, and mineral deposits

TECHNOLOGICAL KNOWLEDGE

society’s understanding of the best ways to produce goods and services

Why are saving, investment, and stable financial markets important?

Because resources are scarce, devoting more to producing capital means producing fewer goods and services for current consumption—a tradeoff. However, when governments encourage saving and investment, they promote economic growth, which raises the long-run standard of living. Additionally, a well-functioning and carefully regulated financial market is essential for supporting this growth by efficiently directing resources toward productive investments.

DIMINISHING RETURNS

the benefit from an extra unit of an input declines as the quantity of the input increases

CATCH-UP EFFECT

countries that start off poor tend to grow more rapidly than countries that start off rich

FOREIGN DIRECT INVESTMENT

a capital investment that is owned and operated by a foreign entity

FOREIGN PORTFOLIO INVESTMENT

an investment that is financed with foreign money but operated by domestic residents

EXTERNALITIES

the effect of one person’s actions on the wellbeing of a bystander.

BRAIN DRAIN

the immigration of many of the most highly educated workers to rich countries, where they can enjoy a higher standard of living.

PROPERTY RIGHTS

the ability of people to exercise authority over the resources they own

Diluting capital stock

▪ According to this theory, high population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly. ▪ A smaller quantity of capital per worker leads to lower productivity and lower GDP per worker