1、? 2007 Thomson South-WesternProduction and GrowthA countrys standard of living depends on its ability to produce goods and services.Within a country there are large changes in the standard of living over time.In the United States over the past century, average income as measured by real GDP per pers
2、on has grown by about 2 percent per year.Production and GrowthProductivityrefers to the amount of goods and services produced from each unit of labor input.A nations standard of living is determined largely by the productivity of its workers.Table 1 The Variety of Growth Experiences ECONOMIC GROWTH
3、AROUND THE WORLDLiving standards, as measured by real GDP per person, vary significantly among nations.The poorest countries have average levels of income that have not been seen in the United States for many decades.Annual growth rates that seem small become large when compounded for many years. Co
4、mpounding refers to the accumulation Productivity: Its Role and DeterminantsWhy Productivity Is So Important Productivityplays a key role in determining living standards for all nations in the world.To understand the large differences in living standards across countries, we must focus on the produc
5、tion of goods and services.How Productivity Is DeterminedThe inputs used to produce goods and services are called the factors of production.The factors of production include:Physical capitalHuman capitalNatural resourcesTechnological knowledgeThe factors of production directly How Productivity Is De
6、terminedPhysical capitalper worker is the stock of equipment and structures that are used to produce goods and services.Physical capital includes:Tools used to build or repair automobiles.Tools used to build furniture.Office buildings, schools, etc.Physical capital is a produced factor of production
7、.It is an input into the production process that in the past was an output from the production process.How Productivity Is DeterminedHuman capitalper worker is the economists term for the knowledge and skills that workers acquire through education, training, and experience. Like physical capital, hu
8、man capital raises a nations ability to produce goods and services.How Productivity Is DeterminedNatural resourcesare inputs used in production that are provided by nature, such as land, rivers, and mineral deposits.Renewable resources include trees and forests.Nonrenewable resources include petrole
9、um and coal.Natural resources can be important but are not necessary for an economy to be highly productive in producing goods and How Productivity Is DeterminedTechnological knowledgeincludes societys understanding of the best ways to produce goods and services. Human capital includes the resources
10、 expended transmitting this understanding to the labor force.FYI: The Production FunctionEconomists often use a production function to describe the relationship between the quantity of inputs used in production and the quantity of output from production.FYI: The Production FunctionY= A F (L, K, H, N
11、) Y= quantity of outputA= available production technologyL= quantity of laborK = quantity of physical capitalH= quantity of human capitalN= quantity of natural resourcesF( ) is a function that shows how the inputs are combined. FYI: The Production FunctionA production function has constant returns t
12、o scale if, for any positive number x,xY= A F (xL, xK, xH, xN )That is, a doubling of all inputs causes the amount of output to double as well.FYI: The Production FunctionProduction functions with constant returns to scale have an interesting implication.Setting x= 1/L,Y/ L= A F (1, K/L, H/L, N/L)Wh
13、ere:Y/L= output per workerK/L= physical capital per workerH/L= human capital per workerN/L= natural resources per workerFYI: The Production FunctionThe preceding equation says that productivity (Y/L) depends on:physical capital per worker ( K/L),human capital per worker ( H/L), and natural resources
14、 per worker ( N/L),as well as the state of technology ( A).ECONOMIC GROWTH AND PUBLIC POLICY Government policies that raise productivity and living standardsEncourage saving and investment.Encourage investment from abroad.Encourage education and training.Establish secure property rights and maintain
15、 political stability.Promote free trade.Promote research and development.Saving and Investment One way to raise future productivity is to invest more current resources in the production of capital.Diminishing Returns and the Catch-Up EffectAs the stock of capital rises, the extra output produced fro
16、m an additional unit of capital falls; this property is called diminishing returns.Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while.In the long run, the higher saving rate leads to a higher level of productivity and Illustrating the Production Fu
17、nctionOutputper worker11Capital perworker1. When the economy has a low level of capital, anextra unit of capital leads to a large increase in output.2. When the economy has ahigh level of capital, anextra unit of capital leads toa small increase in output.Diminishing Returns and the Catch-Up EffectT
18、he catch-up effectrefers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. Investment from AbroadGovernments can increase capital accumulation and long-term economic growth by encouraging investment from foreign sources.Investment fro
19、m abroad takes several forms:Foreign Direct InvestmentCapital investment owned and operated by a foreign entity.Foreign Portfolio InvestmentEducationFor a countrys long-run growth, education is at least as important as investment in physical capital.In the United States, each year of schooling raise
20、s a persons wage, on average, by about 10 percent.Thus, one way the government can enhance the standard of living is to provide schools and encourage the population to take advantage of them.EducationAn educated person might generate new ideas about how best to produce goods and services, which in t
21、urn, might enter societys pool of knowledge and provide an external benefit to others.One problem facing some poor countries is the brain drain the emigration of many of the most highly educated workers to rich countries.Healthier workers are more productive.Good investments in the health of the pop
22、ulation can lead to increase living standards.Countries can get caught in a vicious cycle.Health and NutritionPeople cannot afford adequate health care and nutritious food.People are poorProperty Rights and Political StabilityProperty rights refer to the ability of people to exercise authority over
23、the resources they own.An economy-wide respect for property rights is an important prerequisite for the price system to work.It is necessary for investors to feel that their investments are secure.Free TradeTrade is, in some ways, a type of technology.A country that eliminates trade restrictions wil
24、l experience the same kind of economic growth that would occur after a major technological advance.Free TradeSome countries engage in . . . . . inward-orientated trade policies, avoiding interaction with other countries. . . . outward-orientated trade policies, encouraging interaction with other cou
25、ntries.Research and DevelopmentThe advance of technological knowledge has led to higher standards of living.Most technological advance comes from private research by firms and individual inventors.Government can encourage the development of new technologies through research grants, tax breaks, and t
26、he patent system.Population GrowthEconomists and other social scientists have long debated how population growth affects a society.Population growth interacts with other factors of production:Stretching natural resourcesDiluting the capital stockPromoting technological progressEconomic prosperity, a
27、s measured by real GDP per person, varies substantially around the world.The average income of the worlds richest countries is more than ten times that in the worlds poorest countries.The standard of living in an economy depends on the economys ability to produce goods and services.Productivity depe
28、nds on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers.Government policies can influence the economys growth rate in many different ways.The accumulation of capital is subject to diminishing returns.Because of diminishing returns, higher saving leads to a higher growth for a period of time, but growth will eventually slow down.Also because of diminishing returns, the return to capital is especially high in poor countries.
