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GDP per worker is the measure of the
wealth of nation
• In “The Wealth of Nations”, Adam Smith
argues that the wealth of a nation is not
measured by its supply of precious metals, but
by the productivity of its labor force.
• It is appropriate to use GDP per worker as the
measure of the wealth of a nation.
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Production and Growth
• A country’s standard of living (生活水
準)depends on its ability to produce goods and
services.
• Within a country there are large changes in the
standard of living over time.
• In the United States over the past century,
average income as measured by real GDP per
person has grown by about 2 percent per year.
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Production and Growth
• Productivity (or labor
productivity 生產力 )refers
to the amount of goods and
services produced from
each unit of labor input.
• A nation’s standard of
living is determined largely
by the productivity of its
workers.
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The Variety of Growth Performance
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ECONOMIC GROWTH AROUND THE
WORLD
• Living standards, as measured by real GDP per
person, vary significantly among nations.
• The poorest countries have average levels of
income that have not been seen in the United
States for many decades.
• Annual growth rates that seem small become
large when compounded for many years.
• Compounding refers to the accumulation of a
growth rate over a period of time.
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Productivity: Its Role and Determinants
• Why Productivity Is So Important
– Productivity plays a key role in determining living
standards for all nations in the world.
– To understand the large differences in living
standards across countries, we must focus on the
production of goods and services.
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The Production Function
• Economists often use a production function
(生產函數) to describe the relationship
between the quantity of inputs used in
production and the quantity of output from
production.
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The Production Function
• Y = A F(L, K, H, N)
–
–
–
–
–
–
–
Y = quantity of output
A = available production technology
L = quantity of labor
K = quantity of physical capital (實體資本)
H = quantity of human capital (人力資本)
N = quantity of natural resources (自然資源)
F( ) is a function that shows how the inputs are
combined to produce output.
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The Production Function
• A production function has constant returns to
scale (固定規模報酬) if, for any positive
number x,
xY = A F(xL, xK, xH, xN)
• For example, a doubling of all inputs causes
the amount of output to double as well.
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The Production Function
• Production functions with constant returns to
scale have an interesting implication.
• Setting x = 1/L, then
Y/ L = A F(1, K/L, H/L, N/L)
where:
•
•
•
•
Y/L = output per worker
K/L = physical capital per worker
H/L = human capital per worker
N/L = natural resources per worker
© 2007 Thomson South-Western
The Production Function
• The preceding equation says that labor
productivity (Y/L) depends on:
–
–
–
–
physical capital per worker (K/L),
human capital per worker (H/L),
natural resources per worker (N/L),
and the state of technology (A).
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How Productivity Is Determined
• The inputs used to produce goods and services
are called the factors of production (生產要素).
• The factors of production include:
–
–
–
–
Physical capital (實體資本)
Human capital (人力資本)
Natural resources (自然資源)
Technological knowledge
• The factors of production directly determine
productivity.
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How Productivity Is Determined
• Physical capital per worker is the stock of
equipment and structures that are used to produce
goods and services.
• Physical capital includes:
– Tools used to build or repair automobiles.
– Tools used to build furniture.
– Office buildings, schools, etc.
• Physical capital is a produced factor of
production.
– It is an input into the production process that in the past was an
output from the production process.
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How Productivity Is Determined
• Human capital per worker is the economist’s
term for the knowledge and skills that workers
acquire through education, training, and
experience.
• Like physical capital, human capital raises a
nation’s ability to produce goods and services.
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How Productivity Is Determined
• Natural resources are inputs used in
production that are provided by nature, such as
land, rivers, and mineral deposits.
– Renewable resources include trees and forests.
– Nonrenewable resources include petroleum and
coal.
• Natural resources can be important but are not
necessary for an economy to be highly
productive in producing goods and services.
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How Productivity Is Determined
• Technological knowledge includes society’s
understanding of the best ways to produce
goods and services.
• Human capital includes the resources
expended transmitting this understanding to
the labor force.
• The technical progress is the more important
determinant of productivity growth than the
input factor accumulation.
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Are Natural Resources a Limit to Growth?
• Some argue that natural resources will
eventually limit how much the world’s
economy can growth. However, economists
argue that technical progress often yields ways
to avoid these limits.
• More efficient ways of using energy, recycling,
the development of renewable energy, and
technical progress in materials.
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Are Natural Resources a Limit to Growth?
• The prices of most natural resources are stable.
It appears that our ability to conserve these
resources is growing more rapidly than their
supply are dwindling.
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Population Growth
• Economists and other social scientists have
long debated how population growth affects a
society.
• Population growth interacts with other factors
of production:
– Stretching natural resources
– Diluting the capital stock
– Promoting technological progress
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Relative contributions of sources of economic growth
Hong Kong
Singapore
Capital (K) Labor (L) technical progress (A)
74
26
0
68
32
0
S. Korea
Taiwan
Japan
80
85
56
20
15
5
0
0
39
Non-Asian G5
36
6
59
© 2007 Thomson South-Western
Policies, Institution and Growth
• One way to raise future productivity is to
invest more current resources in the production
of capital.
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Diminishing Returns and the Catch-Up Effect
• As the stock of capital rises, the extra output
produced from an additional unit of capital
falls; this property is called diminishing returns
(報酬遞減).
• Because of diminishing returns, an increase in
the saving rate leads to higher growth only for
a while.
• In the long run, the higher saving rate leads to
a higher level of productivity and income, but
not to higher growth in these areas.
© 2007 Thomson South-Western
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
Capital per
worker
© 2007 Thomson South-Western
Diminishing Returns and the Catch-Up
Effect
• The catch-up effect (追趕效果) refers to the
property whereby countries that start off poor
tend to grow more rapidly than countries that
start off rich.
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Stylized Facts on Economic Development
• In every year studied, there is great wealth
disparity among countries.
In 1985, for example, the highest-output countries
were 29 times richer than the lowest-output
countries.
• Wealth disparity has not increased or decreased.
The distance between the richest and poorest
countries remained essentially the same
throughout the 1960-85 period.
© 2007 Thomson South-Western
Stylized Facts on Economic Development
• There is great wealth disparity (財富差距)
among nations. For example, the highestoutput countries were 29 times richer than the
lowest-output countries.
• Wealth disparity has not increased or
decreased. The distance between the richest
and poorest countries remained essentially the
same throughout the 1960-85 period.
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Wide and Steady Wealth Disparity
Average Per-Capita GDP Relative to U.S. Level for the 5 Richest and Poorest Counties
in the 102-Country Data Set During 1960-85
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The Standard Deviation of Wealth Disparity
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The Standard Deviation of Wealth Disparity
In Western Europe: Decreasing?
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The Standard Deviation of Wealth Disparity
In Southeastern Asia: Definitely Increasing
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Dramatic Divergence in Southeastern Asia
• Per-Capita GDP Relative to 1985 U.S. Level
for 8 Southeastern Asian Countries During 1870-1985
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A Change in the Distribution of Wealth
Per-Capita GDP Relative to U.S. Level in the 102-country Data Set During
1960 and 1985
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A Widespread Upward Shift
Average Real GDP Relative to 1985 U.S. Level for Selected Wealth Groups in
the 102-Country Data Set During 1960-85
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The Poorest Got Richer Too
Per-Capita GDP Relative to 1985 U.S. Level for the 10 Poorest Countries in 1960
1960
1985
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Development Miracles and Disasters
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Basic Theoretical Framework
Social Infrastructure (社會基礎建設)
Input factors’ production, technical progress
GDP per worker
© 2007 Thomson South-Western
ECONOMIC GROWTH AND
PUBLIC POLICY
• Government policies that raise productivity
and living standards
–
–
–
–
Encourage saving and investment.
Encourage investment from abroad.
Encourage education and training.
Establish secure property rights and maintain
political stability.
– Promote free trade.
– Promote research and development.
© 2007 Thomson South-Western
Investment from Abroad
• Governments can increase capital
accumulation and long-term economic growth
by encouraging investment from foreign
sources.
© 2007 Thomson South-Western
Investment from Abroad
• Investment from abroad takes several forms:
– Foreign Direct Investment (外人直接投資)
• Capital investment owned and operated by a foreign
entity.
– Foreign Portfolio Investment (外人股權投資)
• Investments financed with foreign money but operated
by domestic residents.
© 2007 Thomson South-Western
Education
• For a country’s long-run growth, education is
at least as important as investment in physical
capital.
• In the United States, each year of schooling
raises a person’s wage, on average, by about
10 percent.
• Thus, one way the government can enhance
the standard of living is to provide schools and
encourage the population to take advantage of
them.
© 2007 Thomson South-Western
Education
• An educated person might generate new ideas
about how best to produce goods and services,
which in turn, might enter society’s pool of
knowledge and provide an external benefit to
others.
• One problem facing some poor countries is the
brain drain — the emigration of many of the
most highly educated workers to rich countries.
© 2007 Thomson South-Western
Health and Nutrition
• Healthier workers are more productive.
• Good investments in the health of the
population can lead to increase living
standards.
• Countries can get caught in a vicious cycle.
People are poor
People cannot
afford adequate
health care and
nutritious food.
© 2007 Thomson South-Western
Property Rights
• Property rights refer to the ability of people to
exercise authority over the resources they own.
• An economy-wide respect for property rights
is an important prerequisite for the price
system to work.
• It is necessary for investors to feel that their
investments are secure.
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Trade Openness
• Openness is, in some ways, a type of
technology.
• Policies favoring openness yield benefits
associated with the openness itself.
• Trade with other countries yield benefits from
specialization and facilitates the adoption of
ideas and technologies from those countries.
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Trade Openness
• Some countries engage in . . .
– . . . inward-orientated trade policies, avoiding
interaction with other countries.
– . . . outward-orientated trade policies, encouraging
interaction with other countries.
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Research and Development
• The advance of technological knowledge has
led to higher standards of living.
• Most technological advance comes from
private research by firms and individual
inventors.
• Government can encourage the development
of new technologies through research grants,
tax breaks, and the patent system.
© 2007 Thomson South-Western
How Democracy Affects Growth
Democracy is a political system characterized by
the following features:
• It adds the voice of the great number of the
poor to that of the few rich.
• It decreases the discretionary nature of power,
in the sense that political decisions become
more responsive to constraints beyond the
control of politicians.
© 2007 Thomson South-Western
• Equal participation in elections and in the
evaluation of government officials is
universally perceived as a precondition for
social justice. Huntington (1991) states that
‘Democracy is one public virtue ’not the only
one, and the relation of democracy to other
public virtues and vice can only be understood
if democracy is clearly distinguished from
characteristics of political system.
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How Democracy Affects Growth
Democracy yields more political stability:
• In democratic society, there is transparent rules
for the alternation of political force in power.
• Transparent rules yield more peaceful and
predictable transfer of political power.
• Lower degree of uncertainty encourage
investment and hence economic growth.
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How Democracy Affects Growth
Democracy has better quality of governance
• In a democratic society, it is easier to keep the
abuse in adopting distorted policies that benefit
a small group of insider at the expense of the
general population .
• Easier to control policy making means better
quality of governance, which in turn encourage
investment and economic growth.
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How Democracy Affects Growth
• Democracy in a highly unequal society assigns
a more important role of government in
income redistribution by raising tax rates on
capital income.
• Higher captial income tax rate discourage
investment and hence economic growth.
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How Democracy Affects Growth
• In a democratic society, less protectionism
yields more gains from free trade.
• In a democratic society, it is easier to secure
property rights and facilitate contract
enforcement.
• In a democratic society, labor unions and labor
interest groups are given a greater voice.
• Decreases in returns to capital discourage
investment.
© 2007 Thomson South-Western
Summary
• Economic prosperity, as measured by real GDP
per person, varies substantially around the
world.
• The average income of the world’s richest
countries is more than ten times that in the
world’s poorest countries.
• The standard of living in an economy depends
on the economy’s ability to produce goods and
services.
© 2007 Thomson South-Western
Summary
• Productivity depends on the amounts of
physical capital, human capital, natural
resources, and technological knowledge
available to workers.
• Government policies can influence the
economy’s growth rate in many different ways.
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Summary
• The accumulation of capital is subject to
diminishing returns.
• Because of diminishing returns, higher saving
leads to a higher growth for a period of time,
but growth will eventually slow down.
• Also because of diminishing returns, the return
to capital is especially high in poor countries.
© 2007 Thomson South-Western