Overview-7
How
economic growth differs around
the world
Why productivity is the key
determinant of a country’s standard of
living
Factors that determine a country’s
productivity
How a country’s policies influence
growth
Principles of Macroeconomics: Ch 12
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Production and Growth
A
country’s standard of living depends
on its ability to produce goods and
services.
Within every country there are large
changes in the standard of living over
time.
Principles of Macroeconomics: Ch 12
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Economic Growth Around the World
Living
standards, as measured by per
capita real GDP, vary significantly
among nations.
The most developed countries have
real per capita GDP that is ten to
twenty times that of the poorest
countries.
The process of creating a high living
standard is keyed to productivity.
Principles of Macroeconomics: Ch 12
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First Canadian
Country
Japan
Brazil
Canada
West Germany
United States
China
Mexico
United Kingdom
Argentina
Indonesia
Pakistan
India
Bangladesh
Period
1890-1990
1900-1987
1870-1990
1870-1990
1870-1990
1900-1987
1900-1987
1870-1990
1900-1987
1900-1987
1900-1987
1900-1987
1900-1987
Real GDP per
Person at
Beginning of
Period
$ 1,149
595
1,815
1,669
3,063
547
886
3,676
1,753
681
564
516
476
Real GDP per
person at End of
Period
$ 22,036
4,664
23,301
19,503
24,922
2,386
3,640
18,549
4,507
1,638
1,208
904
512
Growth Rate
(per year)
3.00%
2.39
2.15
2.07
1.76
1.71
1.64
1.36
1.09
1.01
.88
.65
.08
Productivity
 Recall
one of the Ten Principles from
Chapter 1: A country’s standard of living
depends on its ability to produce g & s.
 This
ability depends on productivity:
the average quantity of g&s produced
per unit of labour input.
 y = real GDP = quantity of output produced
L = quantity of labour
so we can write productivity as
y/L (output per worker)
Principles of Macroeconomics: Ch 12
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First Canadian
The Rule of 70
Annual
growth rates that seem small
become large when compounded for
many years.
–
Compounding refers to the accumulation
of a rate over a period of time.
Rule
of 70: The value of a variable will
double in approximately
(70 ÷ annual growth rate) years.
Grow at 7% and double in 10 years.
Principles of Macroeconomics: Ch 12
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First Canadian
The Rule of 70: Example
$5,000 invested
at 7 percent
interest per year,
will double in
size in 10 years
70 ÷ 7 = 10
Principles of Macroeconomics: Ch 12
Edition
First Canadian
Assignments etc.
Assignment
1 ODD and EVEN are now
on my web page—Due in 2nd meeting
Chapter 6 notes are up Ch 5 soon
Deferred December exam (med cert
and other valid reasons-NOT a graderaiser) Date etc to be announced in
class soon. Late Jan or early Feb.
Principles of Macroeconomics: Ch 12
Edition
First Canadian
REAL AND NOMINAL
Real
removes price effects. Nominal is
“current dollar”-current prices.
Real income (GDP)
y=Y/P>> Y=P*y
Real wages
w= W/P
Real interest
r=i-pdot
With 0 inflation P is constant, pdot=0
and nominal = real.
 “economic
growth”
Principles of Macroeconomics: Ch 12
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always refers to real
First Canadian
Productivity: Role and Determinants
To
understand the large differences in
living standards we focus on how
goods and services are produced.
Productivity refers to the quantity of
goods and services that a worker can
produce for each hour of work.
The inputs used to produce goods and
services are called the factors of
production.
Principles of Macroeconomics: Ch 12
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First Canadian
How Productivity is Determined
The
Factors of Production include:
Physical Capital--K
– Human Capital
– Natural Resources
– Technological Knowledge
–
Capital
(K) is a produced factor of
production, i.e. capital is an input into the
production process that in the past was an
output from production. Eg machines.
Principles of Macroeconomics: Ch 12
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First Canadian
The Factors of Production:
Physical Capital
The
stock of equipment and structures
that are used to produce goods and
services.
Examples:
Tools used to build or repair automobiles
– Tools used to build homes or buildings
– Buildings, e.g. Factories, offices, schools,
–
Principles of Macroeconomics: Ch 12
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First Canadian
The Factors of Production:
Human Capital
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. SKILLS
Principles of Macroeconomics: Ch 12
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First Canadian
The Factors of Production:
Natural Resources
Inputs
used in production that are
provided by nature, such as land,
rivers, and mineral deposits. They are
not necessary for an economy to be
highly productive. Hong Kong
Renewable Resources:
Trees,
–
forests
Non-Renewable Resources:
Oil,
coal,
POTASH
Principles of Macroeconomics: Ch 12
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The Factors of Production:
Technological Knowledge
The
understanding of the best ways to
produce goods and services.
Technological Knowledge refers to
society’s understanding about how the
world works.
Human Capital refers to the resources
expended transmitting this
understanding to the labour force.
Principles of Macroeconomics: Ch 12
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First Canadian
Economic Growth and Public Policy
Public
policies, laws, traditions, and
institutions are critical to transforming
resources into useful output.
Governments can do many things to
encourage or impede the attainment of
high living standards.
Principles of Macroeconomics: Ch 12
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First Canadian
Economic Growth and Public Policy
Government
policies:
Encourage saving and investment
– Encourage education and training
– Establish secure property rights and
political stability
– Promote free trade policies
– Promote research and development
–
Principles of Macroeconomics: Ch 12
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Government policies:
Encourage saving and investment
One
way to raise future productivity is
to invest more current resources in the
production of capital.
Governments can encourage capital
accumulation:
from domestic sources by imposing low
taxes on interest and dividend income.
– from foreign sources by making such
capital secure and welcome domestically.
–
Principles of Macroeconomics: Ch 12
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Saving and Investment
 We
can boost productivity by increasing K,
which requires investment.
 Since
resources are scarce, producing more
capital requires producing fewer consumption
goods.
 Reducing
consumption = increasing saving.
This extra saving funds the production of
investment goods. (More details in the next
chapter.)
 Hence,
a tradeoff between
current and future consumption.
Principles of Macroeconomics: Ch 12
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Government policies:
Encourage saving and investment
Cautions:
As the stock of capital rises, the extra
output produced from an additional unit
of capital falls (diminishing returns).
– As the higher saving rate allows more
capital to be accumulated, the benefits
from additional capital become smaller
over time, and so growth slows down.
–
Principles of Macroeconomics: Ch 12
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Government policies:
Encourage education and training
Education
is at least as important as
investment in physical capital.
Most countries provide basic
education so that the work force can
acquire the specialized skills leading
to higher productivity.
Principles of Macroeconomics: Ch 12
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First Canadian
Government policies: Establish
secure property rights and political
stability
 Property
rights refer to the ability of people
to exercise authority (ownership) 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 and safe from
political instability and expropriation.
Principles of Macroeconomics: Ch 12
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First Canadian
Government policies:
Promote Free Trade
To
exploit comparative advantage and
maximize production and efficiency, it
is important for countries to have the
opportunity to sell abroad and to be
able to purchase from lower
opportunity cost producers.
Some countries engage in:
Inward-oriented trade policies-Tariffs
– Outward-oriented trade policies
–
Principles of Macroeconomics: Ch 12
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Government policies:
Research and Development
The
advancement of technological
knowledge has led to higher standards
of living. Technological advancement
comes from private firms and public
agencies. Positive externalities.
Government’s role is to encourage the
research and development of new
technologies through research grants,
tax credits, and the patent system.
Principles of Macroeconomics: Ch 12
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First Canadian
Conclusion
 Living
standards, as measured by real GDP
per capita, vary substantially from country
to country.
 In the long run, living standards are
determined by productivity.
 Policies that affect the determinants of
productivity will therefore affect the next
generation’s living standards.
 Government policies and actions can
facilitate or impede economic growth.
Principles of Macroeconomics: Ch 12
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First Canadian