Chapter 12: productivity & growth

Productivity, Y/L

The amount of G & S produced for each hour of work

Key determinants of living standards:

• An economy’s ability to produce G & S. productivity depends on physical capital, human capital, natural resources, and technological knowledge available to workers.

• When a nation’s workers are very productive, real GDP is large, and incomes are high

Physical capital, K

Physical capital per worker, K/L

The stock of equipment and structures that are used to produce G & S 

Human capital, H

Human capital per worker, H/L

Knowledge and skills that workers acquire through education, training, and experience. 

Natural resources, N

Natural resources per worker, N/L

Includes land, rivers, mineral deposits, etc., provided by nature and used as inputs into production

Technological knowledge, A

Understanding of the best way to produce G & S 

Proprietary

it is known only by the company that discovers it

Production Function

Y = A × F(L, K, H, N)

• A graph or equation showing the relation between output and inputs

• F( ) is a function that shows how inputs are combined to produce output

• “A” is the level of technology

• “A” multiplies the function F( ), so improvements in technology (increases in “A”) allow more output (Y) to be produced from any given combination of inputs.

Constant returns to scale

• Changing all inputs by the same percentage results in the output changing by that same percentage.

• Doubling all inputs (multiplying each by 2) causes the output to double:

2Y = A × F(2L, 2K, 2H, 2N)

• Increasing all inputs 10% (multiplying each by 1.1) causes the output to increase by 10%:

1.1Y = A × F(1.1L, 1.1K, 1.1H, 1.1N

Rule of 70

If a variable grows at a constant rate ‘r’, then the variable will double in 70/r years.

Diminishing returns

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

Catch up effect

the property whereby counties that start off poor tend to grow more rapidly than ones that start out rich  

Foreign direct investment

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

Foreign portfolio investment

an investment financed with foreign money but operated by domestic residents  

Externality

effect of one persons actions on the well-being of a bystander

Brain drain

emigration 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

Examples: tariffs, limits on investment from abroad

Outward-oriented policies

integrate these countries into the world economy

Example: elimination of restrictions on trade or foreign investment

Public good

once one person discovers an idea, it enters societies pool of knowledge, and others can freely use it  

Economic Prosperity

as measured by GDP per person various substantially around the world. The avg income in the worlds richest countries is more than 10 times the poorest. Because growth rates of real GDP also vary substantially the relative positions of countires can change dramatically over time

Government policies

can try to influence the economies growth rate in many ways: by encouraging saving and investment, facilitating investment from abroad, fostering education, promoting good health, maintaining property rights and political stability, allowing free trade, and supporting the research and development of new technologies

Population growth has various effects on economic growth:

More rapid population growth may lower productivity by stretching the supply of natural resources and by reducing the amount of capital available to each worker. But a larger population may enhance the rate of technoloigcal progress because there are more scientists and engineers