Chapter 7: Production and Growth
What are the facts about growth rate and living standards around the world?
Why does productivity matter for living standards?
What determines productivity and its growth rate?
How can public policy affect growth and living standards?
Incomes and Growth around the world
1. There are vast differences in living standards around the world
2. Great variation in growth rates across countries
Country rankings can change over time (Countries that are poor are not
doomed to poverty forever and rich countries are not always rich forever)
A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE
GOODS & SERVICES: ability depends on productivity
PRODUCTIVITY = average quantity of goods & services produced each hour of a
Y = Real GDP = quantity of output produced
L = quantity of labour
Y/L = productivity (output per worker)
When nation’s workers are very productive, real GDP is high and incomes are high
As productivity grows rapidly, so do living standards
K = physical capital (structures and equipment used to produce Goods and Services)
Productivity is higher when average worker has more capital (Machines,
K/L = capital per worker
Increase in K/L causes an increase in Y/L (productivity)
H = human capital (knowledge of workers)
H/L = average workers human capital
Increase in H/L (human capital) causes increase in Y/L (productivity) N = Natural resources (inputs in production nature adds; land, mineral)
Increase in N allows country to produce more Y (output)
Some countries have more N, and some countries have less N
(oil, minerals, stuff like that)
Technological knowledge – society’s understanding of the best way to produce
goods & services
Technological progress is as simple as the increase of knowledge that in turn boost
Technological knowledge = society’s understanding of increasing productivity
Human capital = individual’s understanding of increasing productivity
Overall, Y = A F (L, K, H, N)
A- Level of technology
Productivity can be boosted by increasing K, but this requires investment!!
Reducing consumption = increasing saving!!!
Government can implement policies that raise saving and investment
K will rise causing productivity and standards of living to rise
Workers with little K – when you add extra K, productivity increases A LOT
Workers with a lot of K –