Production and Growth

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Production and Growth

• 12

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Economic Growth Around the World

• Growth rate of real GDP over time
• Measures how rapidly real GDP per person grows
  over time
• Is the economy developing and how fast?
• Typically use average GDP growth rate over
  intervals of 5 or more years
• smooth out short-run fluctuations
• shows trend, or long-term, rate of growth

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Productivity its Role and Determinants

• Productivity
• Quantity of goods and services produced from each
  unit of labor input (output per unit labor
  hours?)
• Output per person (per hour)
• Increases in productivity due to
• Improved technology
• Working smarter better educated
• Why productivity is so important
• Key determinant of living standards

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Productivity of Labor output and labor

• Production Function Output F(inputs)

Output increases as labor increases But
increases at a decreasing rate
Average Output increases initially scale effects
Marginal Product of Labor measures how much each
additional individual increases firms
output Value theory of labor wage marg prod
of labor
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Productivity its Role and Determinants

• How productivity is determined
• Physical capital
• Stock of equipment and structures
• Used to produce goods and services
• Human capital
• Knowledge and skills that workers acquire through
  education, training, and experience

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Effect of an Increase in Capital (K) on
Productivity of Labor


Increase in education/training of workers -gt
similar effect
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Productivity its Role and Determinants

• How productivity is determined
• Natural resources
• Inputs into the production of goods and services
• Provided by nature, such as land, rivers, and
  mineral deposits
• Technological knowledge
• Societys understanding of the best ways to
  produce goods and services

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Real GDP in the United States

• 2

This figure shows quarterly data on real GDP for
the U.S. economy since 1965. Recessionsperiods
of falling real GDPare marked with the shaded
vertical bars.
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GNP Growth is Not Steady
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Real GDP (year to year) and Trend Rate of Growth

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US GDP Growth RateSince the Great Recession

TO REFRESH COMPARE SIGNUP TOEXPORT DATA GET FORECAST
TRENDMOV AVGMEANMAXMIN EMBED CHART

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Productivity vs. CompensationEconomic Policy
Institute
                                                  
                      
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GINI Coefficient

• Measuring Income Inequality/Equality

The most equal society will be one in which every
person receives the same income (G 0) the most
unequal society will be one in which a single
person receives 100 of the total income and the
remaining people receive none (G 1-1/N).
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Most Unequal Great Gatsby era
More equal distribution
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Income Inequality in Developed CountriesUsing
the Gini Coefficient (gt G -gt Grtr Inequality)
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Economic Growth and Public Policy

• Saving and investment (in new technology)
• Raise future productivity
• Invest more current resources in the production
  of capital
• Trade-off
• Devote fewer resources to produce goods and
  services for current consumption
• Policy options
• Tax cuts for the rich as they save more (gt .2)
• Savings incentives for all

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Economic Growth and Public Policy

• Diminishing returns and the catch-up effect
• Higher savings rate
• More funds available for Investment
• Investment - gt increase in Capital stock
• Rising productivity (technological shift)
• More rapid growth in GDP
• Increases current labor forces productivity

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The real middle-class challenge - Samuelson

• CEA found
• that inequality isnt the main cause of sluggish
  middle-class incomes. Its poor productivity.
• Rhetorical solutions
• more infrastructure spending
• better schools
• simpler taxes
• more research.
• Though some policies may be desirable, theres no
  guarantee they will improve productivity.
  Influencing productivity is hard because it
  depends on so much (management and workers,
  technology, market behavior, government policies
  and more).

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Economic Growth and Public Policy

• Diminishing returns and the catch-up effect
• Diminishing returns
• Marginal returns on investment
• Benefit (increase in output) from an extra unit
  of an input of K
• Marg return declines as the quantity of the input
  increases
• More mature economies
• Smaller increases in productivity with Investment
  than newer industrializing economies

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Illustrating the production function

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This figure shows how the amount of capital per
worker influences the amount of output per
worker. Other determinants of output, including
human capital, natural resources, and technology,
are held constant. The curve becomes flatter as
the amount of capital increases because of
diminishing returns to capital
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Economic Growth and Public Policy

• Diminishing returns and the catch-up effect
• Catch-up effect
• Countries that start off poor
• Tend to grow more rapidly than countries that
  start off rich
• Poor countries
• Low productivity
• Even small amounts of capital investment
• Increase workers productivity substantially

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Economic Growth and Public Policy

• Diminishing returns and the catch-up effect
• Rich countries
• High productivity
• Additional capital investment
• Small effect on productivity
• Poor countries
• Tend to grow faster than rich countries

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Economic Growth and Public Policy

• Education
• Investment in human capital
• Gap between wages of educated and uneducated
  workers
• Opportunity cost wages forgone
• Conveys positive externality
• Problem for poor countries
• Brain drain

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Economic Growth and Public Policy

• Health and nutrition
• Healthier workers more productive
• The right investments in the health of the
  population
• One way for a nation to increase productivity and
  raise living standards
• Historical trends long-run economic growth
• Improved health - from better nutrition
• Taller workers higher wages better
  productivity

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Economic Growth and Public Policy

• Health and nutrition
• Vicious circle in poor countries
• Are poor
• Because populations are not healthy
• Populations are not healthy
• Because they are poor
• Cannot afford better healthcare and nutrition

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Economic Growth and Public Policy

• Property rights and political stability
• Foster economic growth
• Protect property rights
• Ability of people to exercise authority over the
  resources they own
• Courts enforce property rights
• Promote political stability

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Economic Growth and Public Policy

• Research and development
• Knowledge public good
• Farming methods
• Aerospace research
• Air Force NASA
• Research grants
• National Science Foundation
• National Institutes of Health
• Tax breaks
• Patent system

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Economic Growth and Public Policy

• Population growth
• Large population
• Large labor force
• More consumers
• Stretching natural resources?
• Diluting the capital stock
• High population growth
• Reduces GDP per worker
• Promoting technological progress