Chapter 12 - Production and Growth
Chapter 12 - Production and Growth Econ 110
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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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