Chapter 7.docx

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14 Apr 2012
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Chapter 7: Production and Growth
Economic Growth Around the World
B/c of differences in growth rates, ranking of countries by income changes substantial over time
World’s richest countries have no guarantee they will stay the richest and that the world’s
poorest countries are not doomed forever to remain in poverty
Productivity: Its Role and Determinants
Why Productivity is So Important
Productivity: the quantity of goods and services that a worker can produce for each hour of
work
A nation can enjoy a high standard of living only if it can produce a large quantity of goods and
services
How Productivity Is Determined
Physical Capital per Worker
Physical capital (just capital): the stock of equipment and structures that are used to produce
goods and services
Eg. A worker with only basic hand tools can make less furniture each week than a worker with
sophisticated and specialized woodworking equipment
Factors of production: inputs used to produce goods and services
Capital is a factor of production used to produce all kinds of goods and services, including more
capital
Human Capital per Worker
Human Capital: knowledge and skills that workers acquire though education, training, and
experience
o Eg. Skills accumulated in early childhood programs, high school, university, and on the
job training
Similar to physical capital
o Both raise a nation’s ability to produce goods and services
o Both a produced factor of production
Eg. Students can be viewed as workers who have the important job of producing
human capital (eg. Librarians and teachers) that will be used in future
production
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Natural Resources per Workers
Natural resources: inputs into production that are provided by nature, such as land, rivers, and
mineral deposits
Two forms
o Renewable
Eg. Forest, when one tree cut down, sapling can be put in its place
o Non-renewable
Eg. Oil, only a limited supply
Technological Knowledge
Technological knowledge: understanding of the best ways to produce goods and services
Lots of different forms of tech knowledge
o Once done by one person, can do it over and over again
Eg. Ford and the assembly lines, lots of car companies did it as well
o Propriety
Eg. Coca Cola formula top secret
o propriety for a short time
Eg. New drug, patent. When patent expires, other companies are allowed to
make the drug
Important diff b/w human capital and tech knowledge
o Tech refers to society’s understanding about how the world works
o Human refers to the resources expended transmitting this understanding to the labour
force
o Eg. Tech is the quality of society’s text books, human is the amount of time that the
population has devoted to reading them
Case Study: Are Natural Resources a Limit to Growth?
Natural resources actually been falling in price, cause of technology (eg, takes less to heat a
house)
Market prices give no reason to believe that natural resources are a limit to economic growth
Economic Growth and Public Policy
The Importance of Saving and Investment
Capital is a produced factor of production, a society can change the amount of capital it has
One way to raise future productivity is to invest more current resources in the production of
capital
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 gov’t can encourage growth and, in the
long run, raise the economy’s standard of living
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