ECN Ch. 7 Production and growth
Productivity: Its role and determinates
• Productivity: The quantity of goods and services produced from each hour of a
• How productivity is determined
Physical Capital per worker: The stock of equipment and structures that
are used to produce goods and services.
Human Capital: The knowledge and skills that a worker requires through
education, experience and training.
Natural Resources: The inputs into production of goods and services that
are provided by nature, such as land, rivers and mineral deposits. Consist
of renewable and non renewable resources
Technological Knowledge: Societies understanding of the best ways to
produce goods and services. Technological knowledge refers to societies
understanding of how the world works. Human capital refers to the
resources expended transmitting this knowledge to the labour force.
Economic Growth and Public Policy
What can government do to raise productivity and living standrads
• The Importance of Saving and Investment
One way to raise future production is to invest more current resources in
the production of capital.
Society faces the trade off, for society to invest more in capital it must
consume less and save more of its current income.
Encouraging saving and investment is one way that a government can
encourage growth, and in the long run raise the economy’s standard of
• Diminishing returns and catch up effect
Diminishing returns: The property in whereby the benefit from an extra
unit of an input declines as the quantity of the input increases. When workers
already have a large quantity of capital to use in producing goods and
services, giving them an additional unit of capital increases their productivity
The catch up effect: The property whereby countries that start off poor tend
to grow more rapidly than countries that start off rich.
• Investment from abroad:
Foreign direct investment: A capital investment that is owned by and
operated by a foreign entity.
Foreign portfolio investment: An investment that is financed with
foreign money but operated by domestic residents is called foreign
portfolio investment. • Education: One way in which government policy can enhance standard of
living is to provide good schools to encourage population to take advantage of
education is a positive externality: The effect of one persons actions on
the well being of a bystander. If you are educated then you can generate
new ideas on how best to create goods and services