2.1 The PPF, Economic Growth, and Productivity
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12
Economic Growth
12.1 The PPF, Economic Growth,
and Productivity
12.2 Living Standards and Labor
Productivity Growth
12.3 Issues of Technological
Change
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
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CONSIDER
 Why is the standard of living so much higher in some
countries than in others?
 How can a nation boost its standard of living?
 Why is the economy’s long-term growth rate more
important than short-term fluctuations in economic
activity?
 What is labor productivity, and why has it grown faster in
recent years?
 Are firms or are governments better positioned to identify
the growth industries of the future?
CONTEMPORARY ECONOMICS
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12.1 The PPF, Economic
Growth, and Productivity
Objectives
 Use the production possibilities frontier to
analyze economic growth.
 Define labor productivity, and discuss
what can increase it.
CONTEMPORARY ECONOMICS
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12.1 The PPF, Economic
Growth, and Productivity
Key Terms
 standard of living
 productivity
 labor productivity
 human capital
 physical capital
 capital deepening
 rules of the game
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
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The PPF and Economic Growth
The production possibilities frontier shows
alternative combinations of goods that the
economy can produce if available
resources are used efficiently.
An outward shift of the production
possibilities frontier reflects economic
growth.
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
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Economic Growth
What can generate economic growth?
Greater availability of resources
An improvement in the quality of resources
Technological breakthroughs that make better
use of resources
Improvements in the rules of the game that
enhance production incentives
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
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Capital and Growth
The amount of capital produced this year
will affect the location of the PPF next
year.
Economies that save more can invest and
grow more.
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
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Economic Growth Shown by Outward Shifts
of the Production Possibilities Frontier
Figure 12.1
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
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Productivity
The standard of living is an economy’s
level of economic prosperity, best
measured by the value of goods and
services produced per person.
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
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Labor Productivity
Productivity compares total output to a
specific measure of input.
Labor productivity is the output per unit
of labor.
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
11
Human and Physical Capital
Human capital is the accumulated
knowledge, skill, and experience of the
labor force.
Physical capital, or capital goods,
includes the machines, building, roads,
airports, communications networks, and
other manufactured creations used to
produce goods and services.
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
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Capital Deepening
An increase in the quantity and quality of
capital per worker is called capital
deepening.
Capital deepening contributes to labor
productivity and to economic growth.
CONTEMPORARY ECONOMICS
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2.1 The PPF, Economic Growth, and Productivity
SLIDE
13
Rules of the Game
Rules of the game are the formal and
informal institutions that provide
production incentives and promote
economic activity.
Rules of the game include laws, customs,
and conventions that encourage people to
undertake productive activity.
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