# Chapter 7.docx

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26 Mar 2012
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Chapter 7: Production and Growth
Productivity
- Average quantity of g&s produced from each hour of a worker’s time
- Y = real GDP = quantity of output produced
- L = quantity of labour
- Y/L = productivity (output per worker) what productivity is worth in real terms
Why productivity is Important
- When nations workers are productive, real GDP is large and incomes are high
- When productivity grows rapidly, so do living standards
WHAT DETERMINES PRODUCTIVITY AND ITS GROWTH RATE?
Physical Capital Per Worker
- Stock of equipment and structures used to produce g&s is called physical capital, denoted K
- K/L = capital per worker
- Productivity is higher when average worker has more capital (machines, equipment)
- An increase in K/L causes an increase in Y/L
Human Capital Per Worker
- Knowledge and skills workers acquire through education, training and experience (H)
- H/L = average workers human capital
- Productivity is higher when the average worker has more human capital (education, skills)
- Increase in H/L cause and increase in Y/L
Natural Resources Per Worker (N)
- Inputs into production that nature provides (land, mineral deposits)
- More N allows country to produce more Y, and increase in N/L causes and increase in Y/L
- Some countries are rich because they have abundant resources, but countries need not have
much N to be rich
Technological Knowledge
- Society’s understanding of the best ways to produce g&s
- Any advance in knowledge that boosts productivity
The Production Function
- A graph or equation showing the relation between outputs and inputs:
o Y = A F(L, K, H, N)
o F() a function that shows how inputs are combined to produce output
o “A” – the level of technology
- “A” multiplies the function F(), so improvements in technology (increases in “A”) allow more
output (Y) to be produced from any given combination of inputs
- Property of constant returns to scale: changing all inputs by the same percentage causes output
to change by that percentage, eg
o 3Y = A F(3L, 3K, 3H, 3 N)
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