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Chapter 12 - Production and Growth

by: Erin Payne

Chapter 12 - Production and Growth Econ 110

Marketplace > Kansas State University > Economcs > Econ 110 > Chapter 12 Production and Growth
Erin Payne

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About this Document

These notes cover the lectures of Dr. Mohaned Al-Hamdi for the weeks 3/9/16 - 3/28/16 (Weeks 9 & 10).
principles of Macroeconomics
Dr. Al-Hamdi
Class Notes
Macroeconomics, Econ, 110, Chapter, 12, production, and, growth
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This 6 page Class Notes was uploaded by Erin Payne on Monday May 9, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 11 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.

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Date Created: 05/09/16
  Week 9  March 11th ­ March 28th  Spring 2016  The Real Economy in the Long Run  Chapter 12 Notes  Production and Growth    ● Real GDP per person  ○ Living standard.  ○ Vary widely from country to country.  ● Growth rate  ○ How rapidly real GDP per person grew in the typical year.  ● Because of difference in growth rates  ○ Ranking of countries by income changes substantially over time.  ● The more children in common families < less overall income/GDP per capita.  ● Productivity  ○ Quantity of goods and services.  ○ Produced from each unit of labor input.  ● Why productivity is so important  ○ Key determinant of living standards.  ○ Growth in productivity is the key determinant of growth in living standards.  ○ An economy’s income is the economy’s output.  ● Determinants of productivity  ○ Physical capital per worker.  ○ Human capital per worker.  ○ Natural resources per worker.  ○ Technological knowledge.  ● Physical capital  ○ Stock of equipment and structures.  ○ Used to produce goods and services.  ● Human capital  ○ Knowledge and skills that workers acquire through education, training, and  experience.  ○ Different from labor.   ■ Labor = actual unit, while human capital = skills behind those actual  units.  ● Natural resources  ○ Inputs into the production of goods and services.  ○ Provided by nature, such as land, rivers, and mineral deposits.  ● Technological knowledge  ○ Society’s understanding of the best ways to produce goods and services.  Notes Key:Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided  y instructor.   Week 9  March 11th ­ March 28th  Spring 2016   Standard of Living  ⇐  Depends on  Productivity  ⇐   Depends on: Physical capital, human              capital, natural resources,             Technology  Income ⇒ Spending ↓ ⇒ Lower productivity today    Income ⇒ Saving ↑ ⇒ Higher future productivity ⇒ Higher economic growth    ● Raise future productivity  ○ Invest more current resources in the production of capital.  ○ Trade­off  ■ Devote fewer resources to produce goods and services for current  consumption.  ● Higher savings rate  ○ Fewer resources ­ used to make consumption goods.  ○ More resources ­ to make capital goods.  ○ Capital stock increases.  ○ Rising productivity.  ○ More rapid growth in GDP.  ● Diminishing returns  ○ Benefit from an extra unit of an input.  ○ Declines as the quantity of the input increases.  ● In the long run, higher savings rate  ○ Higher level of productivity.  ○ Higher level of income.  ○ Not higher growth in productivity or income.  ● Every unit to increase input will increase productivity by less than every unit before  it. Known as Diminishing Marginal Productivity.    Country A Country B      Poor     Rich      Lower productivity     Higher productivity        ⇓        ⇓           Higher rate of productivity Lower rate of productivity    ● Catch­up effect  ○ Countries that start off poor  ○ Tend to grow more rapidly than countries that start off rich.  ● Poor countries  ○ Low productivity  Notes Key: Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided by in tructor.   Week 9  March 11th ­ March 28th  Spring 201  ○ Even small amounts of capital investment  ■ Increase workers’ productivity substantially.  ● Rich countries  ○ High productivity.  ○ Additional capital investment.  ■ Small effect on productivity.  ● Poor countries  ○ Tend to grow faster than rich countries.  ● Investment from abroad  ○ Another way for a country to invest in new capital.  ○ Foreign direct investment.  ■ Capital investment that is owned and operated by a foreign entity.  ○ Foreign portfolio investment.  ■ Investment financed with foreign money but operated by domestic  residents.  ● Benefits from investment  ○ Some flow back to the foreign capital owners.  ○ Increase the economy’s stock of capital.  ○ Higher productivity.  ○ Higher wages.  ○ State­of­the­art technologies.  ● World Bank  ○ Encourages flow of capital to poor countries.  ○ Funds from world’s advanced countries.  ○ Makes loans to less developed countries.  ■ Roads, sewer systems, schools, other types of capital.  ○ Advice about how the funds might best be used.  ● World Bank and the International Monetary Fund  ○ Set up after World War II.  ○ Economic distress leads to:  ■ Political turmoil, international tensions, and military conflict.  ○ Every country has an interest in promoting economic prosperity around the world.  ● Education  ○ Investment in human capital.  ○ Gap between wages of educated and uneducated workers.  ○ Opportunity cost: wages forgone.  ○ Conveys positive externalities.  ○ Public education ­ large subsidies to human­capital investment.  ● Problem for poor countries: Brain drain  Notes Key:Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided b  instructor.   Week 9  March 11th ­ March 28th  Spring 201  ● Human capital  ○ Education.  ○ Expenditures that lead to a healthier population.  ● Healthier workers  ○ More productive.  ● Wages  ○ Reflect a worker’s productivity.  ● Right investments in the health of the population.  ○ Increase productivity.  ○ Raise living standards.  ● Historical trends: long­run economic growth  ○ Improved health ­ from better nutrition.  ○ Taller workers ­ higher wages ­ better productivity.  ● Vicious circle in poor countries  ○ Poor countries are poor.  ■ Because their population is not healthy.  ○ Populations are not healthy.  ■ Because they are poor and cannot afford better healthcare and nutrition.  ● Virtuous circle  ○ Policies that lead to more rapid economic growth.  ○ Would naturally improve health outcomes.  ○ Which in turn would further promote economic growth.  ● To foster economic growth  ○ Protect property rights.  ■ Ability of people to exercise authority over the resources they own.  ■ Courts ­ enforce property rights.  ○ Promote political stability.  ● Property rights  ○ Prerequisite for the price system to work.  ● Lack of property rights  ○ Major problem.  ○ Contracts are hard to enforce.  ○ Fraud goes unpunished.  ○ Corruption.  ■ Impedes the coordinating power of markets.  ■ Discourages domestic saving.  ■ Discourages investment from abroad.  ● Political instability  ○ A threat to property rights.  Notes Key:Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided b  instructor.   Week 9  March 11th ­ March 28th  Spring 2016  ○ Revolutions and coups.  ○ Revolutionary government might confiscate the capital of some businesses.  ○ Domestic residents ­ less incentive to save, invest, and start new businesses.  ○ Foreigners ­ less incentive to invest.  ● Inward­oriented policies  ○ Avoid interaction with the rest of the world.  ○ Infant­industry argument.  ■ Tariffs.  ■ Other trade restrictions.  ○ Adverse effect on economic growth.  ● Outward­oriented policies  ○ Integrate into the world economy.  ○ International trade in goods and services.  ○ Economic growth.  ● Amount of trade ­ determined by  ○ Government policy.  ○ Geography.  ■ Easier to trade for countries with natural seaports.  ● Knowledge ­ public good  ○ Government ­ encourages research and development.  ■ Farming methods.  ■ Aerospace research (Air force; NASA)  ■ Research grants.  ● National Science Foundation.  ● National Institutes of Health.  ■ Tax breaks.  ■ Patent system.  ● Large population  ○ More workers to produce goods and services.  ■ Larger total output of goods and services.  ● Stretching natural resources.  ○ Malthus: an ever­increasing population.  ■ Strain society’s ability to provide for itself.  ■ Mankind ­ doomed to forever live in poverty.  ● Diluting the capital stock  ○ High population growth.  ■ Spread the capital stock more thinly.  ■ Lower productivity per worker.  ■ Lower GDP per worker.  Notes Key:Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided  y instructor.   Week 9  March 11th ­ March 28th  Spring 2016  ● Reducing the rate of population growth  ○ Government regulation.  ○ Increased awareness of birth control.  ○ Equal opportunities for women.  ● Promoting technological progress  ○ World population growth.  ■ Engine for technological progress and economic prosperity.  ■ More people = More scientists, more inventors, more engineers.  Notes Key: Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided by in tructor.


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