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Chapter 7 Production and Growth.docx

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Ryerson University
ECN 204
Paul Missios

Chapter 7 Production and Growth Productivity: the quantity of goods and services produced from each hour of a worker’s time Y= real GDP (quantity of output produced), L = quantity of labor, Y/L= productivity (output per worker) How Productivity is Determined Physical Capital per Worker: the stock of equipment and structures that used to produce goods and services. Works are more productive if they have tools with which to work. Factors of production are the inputs used to produce goods and services such as labor. Capital is a factor of production used to produced all kinds of goods and services including more capital K = Physical Capital, K/L = Capital per worker Human Capital per Worker: the knowledge and skills that works acquire through education, training, and experience. H= Human Capital, H/L = the average worker’s human capital Natural Resources per Worker: the inputs into the production of goods and services that are provided by nature such as land, rivers, and mineral deposits. They take two forms: renewable and nonrenewable. N = Natural Resources, more N allows a country to produce more Y Technological Knowledge: society understanding of the best ways to produce goods and services. It means any advance in knowledge that boosts productivity (allows society to get more output from its resources) A= Technological Knowledge per worker Economic Growth and Public Policy -the importance of saving and investments but there is a trade off with current consumption if too much investment in capital Diminishing Returns: the property whereby the benefits from an extra unit of an input declines as the quantity of the input increases. Capital is subject to diminishing returns, as the stock of capital rises, the extra output produced from an additional unit of capital falls. For example, when workers already have a large quantity for capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly. -Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while. As the higher saving rate allows more capital to be accumulated, the benefits from additional capital become smaller over time, and so growth slows down. Catch-Up Effect: the property whereby countries that start off poor tends to grow more rapidly than countries that start off rich. In poor countries, workers lack tools and as a result have low productivity. Small amounts of capital investment would substantially raise the worker’s productivity. Investment from Abroad -To raise K/L and hence productivity, wages, and living standards, the government can encourage: Foreign Direct Investments: a capital investment that is owned and operated by a foreign entity Foreign Portfolio Investment: an investment that is financed with foreign money but operated by domestic residents -Some of the returns from these investments flow back to the foreign countries that supplied the funds-This is very beneficial in poor countries that cannot generate enough saving to fund investment projects themselves and allows them to learn state of the art technologies developed in other countries Education -investment in human capital through knowledge by education Externality: is the effect of one person’s actions on the well being of a bystander -Human capital is important for economic growth because human capital convey positive externalities Brain Drain: the emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living (problem that poor countries face) Health and Nutrition -healthier workers are more productive, making the right investments in health of the population is one way for a nation to increase productivity and raise living standards -height
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