Chapter 25: Production and Growth
Chapter 25: Production and Growth
Large differences in income are reflected in the standard of living.
Growth rates in income vary.
To understand production and growth, international data on the GDP per person must be examined, as well as productivity and the link between it and the economic policies of a nation.
Chapter 25.1: Economic Growth around the World
The data on real GDP per person varies from country to country.
The world’s richest countries is not guaranteed to remain well off, and the world’s poor countries will not always stay poor
Chapter 25.2: Productivity: Its Role and Determinants
25.2a: Why Productivity Is So Important
Productivity: the quantity of goods and services produced from each unit of labor input
Productivity creates outputs for the economy. The economy’s output is the economy’s income.
High standards of living are correlated with a larger amounts of outputs
25.2b: How Productivity Is Determined
Productivity is determined by physical capital, human capital, natural resources, and technological knowledge.
Physical capital: the stock of equipment and structures that are used to produce goods and services
Workers are more productive if they have tools to use
Labor, capital, land, and entrepreneurship are called the factors of productions
Capital is a produced factor of production, which can make more capital
Human capital: the knowledge and skills that workers acquire through education, training, and experience
These are less tangible than physical capital
HUman capital raises productivity as well
Natural resources: the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
Places with more natural resources are more likely to raise the standard of living, but regions with less natural resources still can succeed (like Japan)
There are renewable resources and nonrenewable resources
Technological Knowledge: society’s understanding of the best ways to produce goods and services
This takes many forms
Technological knowledge is the actual content and quality of certain items, where human capital is the time spent reading it.
Chapter 25.3: Economic Growth and Public Policy
25.3a: Saving and investment
A society can change the amount of capital
To raise future productivity, devote more resources to production of capital
If resources are scarer, saving is necessary
Society must lessen now to grow bigger later
25.3b: 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
When workers already have a large quantity of capital, even more extra capital will only increase productivity slightly.
Diminishing returns of capital is also known as diminishing marginal product of capital
A higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables
Catch-up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
Small amounts of increased capital while capital is extremely low can increase low productivity greatly.
Poor countries tend to grow at faster rates than rich countries
25.3c: Investment from Abroad
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
When investing, a return is expected. Otherwise, investments would not be made
Foreign investments are a way for a country’s economy to grow
The World Bank attempts to flow capital from rich to poor countries
They use resources to make loans, which are then invested in capital
25.3d: Education
Education is an investment in human capital which has an opportunity cost
When in school, the opportunity to work in the labor force is given up
Externality: the effect of one person’s actions on the well-being of a bystander
An educated person might generate more ideas because of their status
Brain drain: the emigration of many of the most highly educated workers to rich countries, where the workers enjoy a standard of living
25.3e: Health and Nutrition
Height is reflected as an indicator of productivity-taller workers earn more
This may be an effect of malnutrition, where in poor countries, wealth is more uncommon
Policies that lead to economic growth naturally improve health outcomes
25.3f: Property Rights and Political Stability
Economic growth can be fostered from the protection of property rights and promotion of political stability
Property rights: the ability of people to exercise authority over the resources they own
This majorly includes the justice system.
In poor countries, justice systems are more likely to be fraudulent.
Economic prosperity depends on favorable political institutions.
25.3g: Free Trade
Inward oriented policies attempt to increase productivity and the standard of living by focusing domestically, and cutting international communication
Outward oriented policies focus on international communication and are more likely to help a country succeed
The amount a nation trades also depends on geography
25.3h: Research and Development
Knowledge is a public good
Most technical advances come from private research, but there is a public interest in it.
Once one person discovers something, everyone can use it
The government tries to encourage research and development by using research grants and patent systems
By offering the chance to earn profit, investors have an incentive
25.3i: Population Growth
A larger population corresponds to a larger labor force, but also a larger consumer market
Therefore, a larger population does not necessarily mean a larger standard of living
An increasing population will struggle to limit the use of natural resources, according to Thomas Robert Malthus. However, Malthus failed to account for the ever growing use of technology
According to modern theories, population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly. Some believe reducing population growth would help a raised standard of living.
Rapid population growth also means more technological progress, which then can induce more population growth
Chapter 25: Production and Growth
Large differences in income are reflected in the standard of living.
Growth rates in income vary.
To understand production and growth, international data on the GDP per person must be examined, as well as productivity and the link between it and the economic policies of a nation.
Chapter 25.1: Economic Growth around the World
The data on real GDP per person varies from country to country.
The world’s richest countries is not guaranteed to remain well off, and the world’s poor countries will not always stay poor
Chapter 25.2: Productivity: Its Role and Determinants
25.2a: Why Productivity Is So Important
Productivity: the quantity of goods and services produced from each unit of labor input
Productivity creates outputs for the economy. The economy’s output is the economy’s income.
High standards of living are correlated with a larger amounts of outputs
25.2b: How Productivity Is Determined
Productivity is determined by physical capital, human capital, natural resources, and technological knowledge.
Physical capital: the stock of equipment and structures that are used to produce goods and services
Workers are more productive if they have tools to use
Labor, capital, land, and entrepreneurship are called the factors of productions
Capital is a produced factor of production, which can make more capital
Human capital: the knowledge and skills that workers acquire through education, training, and experience
These are less tangible than physical capital
HUman capital raises productivity as well
Natural resources: the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
Places with more natural resources are more likely to raise the standard of living, but regions with less natural resources still can succeed (like Japan)
There are renewable resources and nonrenewable resources
Technological Knowledge: society’s understanding of the best ways to produce goods and services
This takes many forms
Technological knowledge is the actual content and quality of certain items, where human capital is the time spent reading it.
Chapter 25.3: Economic Growth and Public Policy
25.3a: Saving and investment
A society can change the amount of capital
To raise future productivity, devote more resources to production of capital
If resources are scarer, saving is necessary
Society must lessen now to grow bigger later
25.3b: 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
When workers already have a large quantity of capital, even more extra capital will only increase productivity slightly.
Diminishing returns of capital is also known as diminishing marginal product of capital
A higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables
Catch-up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
Small amounts of increased capital while capital is extremely low can increase low productivity greatly.
Poor countries tend to grow at faster rates than rich countries
25.3c: Investment from Abroad
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
When investing, a return is expected. Otherwise, investments would not be made
Foreign investments are a way for a country’s economy to grow
The World Bank attempts to flow capital from rich to poor countries
They use resources to make loans, which are then invested in capital
25.3d: Education
Education is an investment in human capital which has an opportunity cost
When in school, the opportunity to work in the labor force is given up
Externality: the effect of one person’s actions on the well-being of a bystander
An educated person might generate more ideas because of their status
Brain drain: the emigration of many of the most highly educated workers to rich countries, where the workers enjoy a standard of living
25.3e: Health and Nutrition
Height is reflected as an indicator of productivity-taller workers earn more
This may be an effect of malnutrition, where in poor countries, wealth is more uncommon
Policies that lead to economic growth naturally improve health outcomes
25.3f: Property Rights and Political Stability
Economic growth can be fostered from the protection of property rights and promotion of political stability
Property rights: the ability of people to exercise authority over the resources they own
This majorly includes the justice system.
In poor countries, justice systems are more likely to be fraudulent.
Economic prosperity depends on favorable political institutions.
25.3g: Free Trade
Inward oriented policies attempt to increase productivity and the standard of living by focusing domestically, and cutting international communication
Outward oriented policies focus on international communication and are more likely to help a country succeed
The amount a nation trades also depends on geography
25.3h: Research and Development
Knowledge is a public good
Most technical advances come from private research, but there is a public interest in it.
Once one person discovers something, everyone can use it
The government tries to encourage research and development by using research grants and patent systems
By offering the chance to earn profit, investors have an incentive
25.3i: Population Growth
A larger population corresponds to a larger labor force, but also a larger consumer market
Therefore, a larger population does not necessarily mean a larger standard of living
An increasing population will struggle to limit the use of natural resources, according to Thomas Robert Malthus. However, Malthus failed to account for the ever growing use of technology
According to modern theories, population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly. Some believe reducing population growth would help a raised standard of living.
Rapid population growth also means more technological progress, which then can induce more population growth