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The Real Economy in The Long Run- Chapter 7.docx

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Carl Denis

The Real Economy in The Long Run  Economic Growth Around the World • The growth of GDP worldwide varies from country to country and from year to year • There is no guarantee that the rich will stay rich and that the poor will stay poor Productivity and its Determinants • Productivity is defined as the amount of output created with each hour of a worker’s time If a man lives alone on an island, he eats only what he catches; wears only what he makes; and lives in shelter that he builds. This means that his standard of living depends on his productivity. The same goes for a country and its GDP 1. Physical capital per worker( stock of equipment and structures) 2. Human capital per worker ( the knowledge and skills acquired through training, education, experience)*note that natural resources are not a huge issue as technology yields over consumption 3. Natural Resources per worker ( helpful but not always crucial to success of a business/country) 4. Technological Knowledge (society’s understanding of the best ways to produce goods and services) Economic Growth and Public Policy The importance of Saving and Investment • Capital is a produced factor of production and so a society can control the amount of capital it has or creates , however devoting more resources to producing capital means less resources devoted to producing goods and services for consumption Diminishing Returns • This principle states that the benefit from an extra unit of input declines as the quantity of input increases Higher saving rate leads to a higher level of productivity and Income but not to higher growth in these variables Catch­up Effect • The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich tend to grow more rapidly than countries that star off rich(ex: MIP) Investment from Abroad
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