Chap 25Growth

8/13/2019 Chap 25Growth

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Production and Growth

Chapter 25


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Production and Growth A countrys standard of living depends on

its ability to produce goods and services.

Within a country there are large changes inthe standard of living over time.

In the United States over the past century,average income as measured by real GDP perperson has grown by about 2 percent peryear.


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Production and Growth

Productivity refers to the amount of goodsand services produced for each hour of a

workers time. A nations standard of living is determinedby the productivity of its workers.A fishing tale-Throw Net fishing, howproductive is it? Bring the throw net!


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Economic Growth Around theWorld

Living standards, as measured by realGDP per person, vary significantlyamong nations.

The poorest countries have averagelevels of income that have not been seen

in the United States for many decades.


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Table 1 The Variety of Growth Experiences

Copyright2004 South-Western


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Compounding and the

Rule of 70 Annual growth rates that seem smallbecome large when compounded formany years.Compounding refers to theaccumulation of a growth rate over aperiod of time.


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Compounding and the

Rule of 70

According to the rule of 70 , if somevariable grows at a rate of x percentper year, then that variable doublesin approximately 70/x years.


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An Example of the Rule of 70

$5,000 invested at 7 percent interest peryear, will double in size in 10 years

70/ 7 = 10


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How Productivity is Determined

The inputs used to produce goods andservices are called the factors ofproduction .

The factors of production directlydetermine productivity.


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Government Policies That RaiseProductivity and Living Standards

Encourage saving and investment.

Encourage investment from abroadEncourage education and training.

Establish secure property rights andmaintain political stability.


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Government Policies That RaiseProductivity and Living Standards

Promote free trade.

Control population growth.

Promote research anddevelopment.


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The Importance of Saving andInvestment

There is definitely a link betweeninvestment today and growth in thefuture.


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(a) Growth Rate 1960-1991 (b) Investment 1960-1991

South KoreaSingapore

JapanIsrael

CanadaBrazil

West GermanyMexico

United KingdomNigeria

United StatesIndia

BangladeshChile

Rwanda

Growth Rate (percent)0 1 2 3 4 5 6 7

South KoreaSingapore

JapanIsrael

CanadaBrazil

West GermanyMexico

United KingdomNigeria

United StatesIndia

BangladeshChile

Rwanda

Investment (percent of GDP)0 10 20 30 40

Growth and Investment


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The Importance of Saving andInvestment

As the stock of capital rises, the extra outputproduced from an additional unit of capital

falls; this property is called diminishingreturns.Because of diminishing returns, an increase inthe saving rate leads to higher growth only for

a while.Thus small countries can grow faster than bigcountries.


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Investment from Abroad

Investment from abroad takes severalforms:

Foreign Direct Investment Capital investment owned and operated by aforeign entity.

Foreign Portfolio Investment Investments financed with foreign money butoperated by domestic residents.


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Education

For a countrys long -run growth, educationis at least as important as investment in

physical capital.Human CapitalIn the United States, each year of schoolingraises a persons wage on average by about 10percent.Thus, one way the government can enhance thestandard of living is to provide schools.


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Property Rights and PoliticalStability

Proper ty rights refer to the ability of people toexercise authority over the resources they own.

An economy-wide respect for property rights isan important prerequisite for the price system towork.

It is necessary for investors to feel that their

investments are secure.Napster anyone?


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Free Trade

Trade is, in some ways, a type of technology.A country that eliminates trade restrictions

will experience the same kind of economicgrowth that would occur after a majortechnological advance.Remember globalization?


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Control of Population Growth

Population is a key determinant of a countryslabor force.

Large populations tend to produce greater totalGDP.However, GDP per person is a better measure ofeconomic well-being, and high population growthreduces GDP per person.

Thomas Malthus theory of population growth andeconomic well-being.


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Research and Development,Epilogue

The advance of technological knowledge has led tohigher standards of living.

Most technological advance comes from private

research by firms and individual inventors.Government can encourage the development of newtechnologies through research grants, tax breaks, andthe patent system.

There are pros and cons to productivity gainsthough, show Solman DVD video on productivity.


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Productivity and Bathrooms

This is a tale of the self-cleaning bathroom.Think about whatproductivity means interms of goods andservices, jobs and wages.Journal Question-Canyou think otherexamples where therewas a major innovationthat has impacted jobs?

QuickTime an d aVideo d ecompressor

are needed to see t his picture.

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Chap 25Growth