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7. Incomes and Growth Rates Around the World.docx

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University of Waterloo
ECON 102
Maryann Vaughan

Incomes and Growth Rates Around the World January-21-13 3:13 PM Great variation in both growth rates and standards of living around the world  Poor countries are not necessarily doomes to poverty forever. o Singapore - incomes low in the 1960s and are high now  Rich countries may be overtaken by poorer but faster growing countries Productivity January-21-13 3:25 PM  A country's standard of living depends on its ability to produce goods and services  This ability depends on productivity o Th eaverage quantity of goods and services 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)  A nation with productive workers has a large real GDP and incomes are high  When productivitiy grows rapidly, so do living standards Physical Capital Per Worker  Equipment and strucures used to produce g&s is called physical capital (K)  K/L = Capital per worker  Productivity is higher when the average worker has more capital  i.e. an increase in K/L causes an increse in Y/L  Labour's productivity is further enhanced if it works with modern and sophisticated equipment Human Capital Per Worker  Human Capital (H): o The knowledge and skills workers aquire through education, training, experience o H/L = the avverage worker's human capital o Productivity is higher when the average worker has more human capital o An increase in H/L causes an increase in Y/L o The size and skill of the labour force will affect the total output. o Workers who are healthy, happy and educated are faster and more efficient than those who are malnourished, dispirited and illiterate Natural Resources per Worker  Natural resources (N) o The inputs into production that nature provides, e.g. land, mineral deposits  Other things equal, more N allows a country to produce more Y. in per worker terms, an increase in N/L causes an increase in Y/L  Some countries are rich because they have abundant resources ( Saudi Arabia has lots of Oil)  But countries need not have much N to be rich (e.g. Japan imports the N it needs)  e.g. o Fertile land o Navigable waterways o Extractable metals and ores o Abundant energy sources Technological Knowledge  Society's understanding of the best ways to produce g&s  Technological progress does not only mean a faster computer, a higher definition tv, or a smaller phone It means any advance in knowledge that boosts productivity ( allows more output from resources  o The assembaly line Production January-21-13 3:45 PM The production Function  Graph showing the relation between outputs and inputs  ( )  A is level of tech  Function has constant returns to scale: o Changing all inputs by same percentage causes putput to change by that percentage  ( )  Economists use the production function to describe the relationship between the quantity of inputs and the quantity of outputs used in production  Y=f(K,L) o Some level of tech exists Public Policy January-23-13 3:03 PM Public Policy  Real factors o Physical capital o Human capital o Natural resources o Technology  Important to public policies created by government Saving and Investment  We can boost productivity by increasing K which requires investment  Since resources are scarce, producing more capital requires producing fewer consumption goods  Reducing consumption = increasing saving o Extra saving funds th eproduction of investment goods o Trade off between current and future consumption Diminishimg Returns and the Catch-up effect  Th
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