Chapter
12
Production and Growth
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
2
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
3
Production Function: Output = F(inputs)
Productivity of Labor – output and labor
Output increases as labor increases
But increases at a decreasing rate
Average Output increases initially – scal
Marginal Product of Labor measures h
each additional individual increases fir
Value theory of labor: wage = marg pr
4
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
5
Effect of an Increase in Capital (K) on Productivity of
Labor
Increase in education/training of workers -> similar effect
6
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
• Society’s understanding of the best ways to
produce goods and services
7
2
Real GDP in the United States
This figure shows quarterly data on real GDP for the U.S. economy since 1965.
Recessions—periods of falling real GDP—are marked with the shaded vertical bars. 8
GNP Growth is Not Steady
9
Real GDP (year to year) and Trend Rate of Growth
10
CHART
January
May
2010
2013
TYPE
US GDP Growth Rate
Since the Great Recession
TO
R
E
F
R
E
S
H
S
I
G
N
U
P
T
O
:
E
X
P
O
|
R
C
T
O
D
M
A
P
T
A
A
R
|
E
G
E
T
F
O
R
E
C
A
S
T
T
R
E
N
D
M
E
O
M
V
B
A
E
V
D
G
C
M
H
E
A
A
R
N
T
M
A
X
M
I
N
Productivity vs. Compensation
Economic Policy Institute
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13
14
Measuring Income Inequality/Equality
GINI Coefficient
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).
15
Most Unequal
“Great Gatsby” era
More equal
distribution
16
Income Inequality in Developed Countries
Using the Gini Coefficient (> G -> Grtr Inequality)
17
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 (> .2)
– Savings incentives for all
18
Economic Growth and Public Policy
• Diminishing returns and the catch-up effect
• Higher savings rate
– More funds available for Investment
• Investment - > increase in Capital stock
– Rising productivity (technological shift)
– More rapid growth in GDP
• Increases current labor force’s productivity
19
The real middle-class challenge - Samuelson
CEA found:
that inequality isn’t the main cause of sluggish middle-class incomes. It’s poor
productivity.
Rhetorical solutions:
•
more infrastructure spending;
• better schools;
• simpler taxes;
• more research.
Though some policies may be desirable, there’s 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).
20
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
21
Figure 1
Illustrating the production function
Output
per Worker
1
2. When the economy has a
high level of capital, an
extra unit of capital leads to
a small increase in output.
1. When the economy has a low level of capital, an
extra unit of capital leads to a large increase in output.
1
Output per Worker
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
22
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
23
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
24
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
25
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
26
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
27
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
28
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
29
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
30