Mankiw, Cha. 12 - Production and Growth

productivity

the amount of goods and services produced from each unit of labour

the main determinant of a nation’s standard of living is…?

Productivity!!!

A country’s standard of living depends on its ___?

ability to produce goods and services.

factors of production

the inputs used to produce goods and services

What are the four factors of production?

1). physical capital (or just “capital”),

2). human capital,

3). natural resources,

4). technological knowledge.

physical capital (or just “capital” for short)

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

What is a “produced” factor of production?

It is an input into the production process that in the past was an output from the production process.

human capital

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

2). expenditures that lead to a healthier population.

natural resources

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

What are the two forms of natural resources?

1). renewable resources,

2). nonrenewable resources.

technological knowledge

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

Which factors of production are “produced factors of production”?

physical capital (or just “capital”) and human capital

How can you explain the difference between technological knowledge and human capital?

Technological knowledge refers to society’s understanding of how the world works.

Human capital refers to the resources expended transmitting this understanding to the people who make use of it.

Here’s a metaphor: “Technological knowledge is the quality of society’s textbooks; and human capital is the amount of time that the population has spent reading them.

production function

a tool often used by economists to describe the relationship between the quantity of inputs used in production and the quantity of output from production.

constant returns to scale

If a production function has constant returns to scale, then doubling all inputs causes the amount of output to double as well.

diminishing returns (aka, the “diminishing marginal product of capital”)

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

In the long run, a higher saving rate leads to a higher level of productivity and income, but NOT to ___

NOT to higher growth in these variables.

the catch-up effect

the property whereby 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 financed with foreign money but operated by domestic residents

externality

the effect of one person’s actions on the well-being of a bystander

brain drain

the emigration from poor countries of highly educated workers to rich countries, where these workers can earn more.

property rights

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

inward-oriented policies

aim to increase productivity and living standards by avoiding interaction with the rest of the world

outward-oriented policies

aim to integrate countries into the world economy

Knowledge is a ___ good.

public good: once one person discovers an idea, it enters society’s pool of knowledge, and other people can freely use it.

inclusive institutions

spread political power widely, respect property rights and the rule of law, and thereby foster economic prosperity.

extractive institutions

designed to exploit a region’s population and natural resources

example: authoritarian governments

Martin Feldstein’s 10 reasons why the U.S. is still richer than every other large country:

1). an entrepreneurial culture,

2). a financial system that supports entrepreneurship,

3). world-class research universities,

4). labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations,

5). a growing population, including from immigration,

6). a culture (and tax system) that encourages hard work and long hours,

7). a supply of energy that makes North America energy independent,

8). a favorable regulatory environment,

9). a smaller size of government than in other industrial countries,

10). a decentralized political system in which states compete.