ECON 0200 Chapter 12

YPC

GDP per capita

real GDP per capita

the nation’s real GDP divided by the nation’s population level

YPC formula

If YPC increases, then

the average standard of living increases as well

What can cause YPC to increase?

RGDP increases faster than POP does
• POP decreases faster than RGDP does

To study economic growth we need three theories

What are the inputs used in production?
How are these inputs combined in production?
What determines the rate at which output per capita grows over time?

In macro, we usually assume all production uses two inputs

capital and labor

labor is

The number of workers available
The number of hours each of those workers supply to production

capital is

Equipment used in production (think machines, computers)
Structures used to aid production (think roads)

So, production is fueled by

machinery and the people operating it

production function

a function F that takes two arguments: capital K and labor L. When evaluated at (K , L), the production function determines
the level of RGDP

production function mathematically

Given a country’s physical capital and available labor,

F determines its RGDP

this isn’t an exact measure but a helpful model

returns to scale

of a production function dictates how Y scales when we scale the inputs of the production function

If K and L are both scaled up by a factor greater than 1

Production is (typically) increasing in K and L, so

K , L ↑ =⇒ Y ↑

But increasing both is

significant investment

to be productive, the economy should

produce a lot with what it already has

What is the main driver of productivity gains?

Technological innovation

Total factor productivity (TFP)

is the share of output not explained by the value of the factors of production.

If countries A and B have the same K , L but A produces more

then A must have a higher TFP than B

TFP captures

the knowledge and skills not accounted for in K , L

production function with TFP

A =

level of technology

increasing A can

quickly and efficiently raise Y

growth is determined by

technology and factors of production

We’d like to know what determines a nation’s

economic growth

some questions

How can we increase the factors of production?
• How can we increase productivity?
• Why do some nations grow faster than others?

forms of capital

Production machinery (tools, factory equipment)
• Communication infrastructure (telecomm, internet)
• Transportation infrastructure (roads, train tracks, ports)

how to increase K?

Increase investment

how to increase YPC?

Increase capital per worker

human capital

the knowledge and skills workers acquire through education, formal training, and work experience

Workers with high HC

can do more with fewer resources and in less time
If HC increases, L effectively increases too

how to increase HC?

Invest in education and work training

Research and Development

the process in which time and effort and invested into finding new technologies and ideas

What are the main sources of R&D?

Private companies (i.e. Bell Labs)
• Government research facilities (i.e. NASA)
• Universities (i.e. Penn!)

How to increase TFP?

Increase investment in R&D

YPC growth comes from

new technologies, new goods, and increased investment

To increase the amount of goods available for consuming and trading:

Subsidies for R&D
• Free trade between nations

To promote private investment:

Patent protection of ideas
• Political stability
• Public health measures

Several factors can lead to low economic growth

Low educational attainment
• Poor public health
• Untrustworthy and unstable political institutions

In many cases, these have been caused by the legacy of colonialism:

While in power, they extracted resources and don’t invest locally
• When leaving, they didn’t help set up a stable political system

Emphasizing YPC growth is not a perfect measure of the standard of living:

RGDP growth can have adverse side effects (i.e. pollution)
• A country may have low growth through no fault of their own
• The gains of productivity growth may not fall evenly

while a useful measure,

YPC does not tell a complete story