12.1 Economic Growth around the World

• GDP (Gross Domestic Product) per person shows that living standards vary widely from country to county

  • For example, income per person in the U.S. is about 8 times the income in China and about 16 times in India

12.2: Productivity: Its Role and Determinants

Why Productivity Is So Important:

• Productivity- the number of goods and services produced from each unit of labor input (review)

  • Productivity is the determinant of growth in living standards

  • The growth in that productivity is the determinant of growth in living standards

How Productivity Is Determined:

• Physical Capital per Worker

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

• Human Capital per Worker

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

• Natural Resources per Worker

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

• Technological Knowledge

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

12.3 Economic Growth and Public Policy

Saving and Investment:

• To raise future productivity

  • Invest more current resources in the production of capital

    • These resources are scarce- so devoting more resources to produce capital requires devoting fewer resources to producing goods and services for current consumption

• In order for growth from capital accumulation, it requires society to sacrifice consumption of goods and services in the present to enjoy higher consumption in the future

Diminishing Returns and the Catch-Up Effect:

• Diminishing returns- the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

• Catch-up effect- the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

Investment from Abroad:

• 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

Education:

• Investment in human capital

  • As important as investment in physical capital for a country’s long-run economic success

• Can generate new ideas regarding the best possible production of goods and services

  • This contributes to the society’s pool of knowledge

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

• One major issue is brain drain

  • Brain drain- the emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living.

Health and Nutrition:

• Healthier workers are more productive

  • An increase in productivity raises the living standards

  • Promotes economic growth

Property Rights and Political Stability:

• Property Rights- the ability of people to exercise authority over the resources they own

  • Political instability poses a threat to property rights

Free Trade:

• Inward-oriented policies- policies that attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world

• Economists believe that poor countries are better off pursuing outward-orientated policies

  • International trade in goods and services can improve the economic well-being of a country’s citizens.

Research and Development:

• Technological advancements led to a rise in living standards

  • Mainly from private research by firms and individual inventors

• Patent system- When a person or firm invents a new product, such as a new drug, the inventor can apply for a patent.

Population Growth:

• The direct effect on the size of the labor force is the population size

• Effects on population growth

  • Stretching natural resources

  • Diluting the capital stock

  • Promoting Technological Progress