1. Why is the standard of living so much
higher in some countries than
others?
2. How can we increase our standard of
living?
3. What is labor productivity?
The standard of living
is (imperfectly )by the
quantity of goods and
services produced per
person or per capita
1. Increase in the amount and quality of
resources—land, labor, capital, and
entrepreneurship.
2. Better technology
3. Better “rules of the game”—tax laws, property
rights, market rules, . . .
Economic growth shown by shifts outward in
the PPF
(a) Lower growth
(b) Higher growth
C’’
C
Consumer goods
Consumer goods
C’
A
I
I’ Capital goods
C
B
I
I’’ Capital goods
An economy that produces more capital goods will grow more, as reflected by a shift
outward of the PPF. More capital goods and fewer consumer goods are produced in panel
(b) than in panel (a); so the PPF shifts out more in panel (b).
4
Productivity is the ratio of a specific measure of
output (such as real GDP) to a specific measure
of input (such as labor). Think of productivity as
output per unit of input.
Labor productivity is output per unit of labor;
measured by real GDP divided by hours of labor
time employed to produce that output.
Labor productivity
depends on the quality
of the labor force. But
it also depends on the
efficiency with which
labor is integrated into
the production
process.
Average years of education of working-age
populations in 1998 and 2003
In 1998 the United
States led major
economies in average
education of the
working-age
population, at 27%. By
2003 it had increased to
29%, both times
ranking first among
industrial market
economies.
7
Improving the quality of the
labor force requires
allocating scarce resources
for education and training.
A farmer can harvest more
wheat per hour with a
harvester.
Per-worker production function: The relationship
between the amount of capital per worker and average
output per worker (productivity).
Capital Deepening: An increase in the amount of
capital per worker; one source of rising labor
productivity.
Output per worker
Per-worker production function
PF
y
0
k
The per-worker production function,
PF, shows a direct relationship between
the amount of capital per worker, k,
and the output per worker, y.
Capital per worker
The bowed shape of PF reflects the law of diminishing marginal returns from capital: As
more capital is added to a given number of workers, output per worker increases but at a
diminishing rate and eventually could turn negative.
10
Many key innovations have boosted labor
productivity, including:
1. The assembly line
2. Continuous process methods in refining and
chemicals
3. Mechanization of agriculture
4. Seed genetics
5. Improved telecommunications
6. Robotics
7. Automated data capture
8. Containerization
9. Air conditioning
10.Internet browser software
In most coffee shops these days, you'll find that
the small, medium, and large coffee cups all use
the same size lid now, whereas even five years
ago they used to have different size lids for the
different cups. That small change in the
geometry of the cups means that somebody can
save a little time in setting up the coffee shop,
preparing the cups, getting your coffee, and
getting out. Millions of little discoveries like that
. . . have made the quality of life for people
today dramatically higher than it was 100 years
ago.
Professor Paul Romer, Stanford
University
Impact of technological breakthrough on the
per-worker production function
Output per worker
PF’
y’
PF
y
0
k
A technological breakthrough increases
output per worker at each level of
capital per worker.
Better technology makes workers more
productive.
This is shown by an upward rotation of
the per-worker production function
from PF to PF’.
An improvement in rules of the game
would have a similar effect.
Capital per worker
13
Computers and
productivity
•
•
•
•
1971: 400 computations/second
1981: 330,000 computations/second
Today: 3 billion computations/second
Productivity boost
– Efficiency gains – production
• Computers
• Semiconductors
– Greater computer use by industry
14
Long-term trend in US labor productivity:
annual average by decade
15
Labor productivity in the USA since 1995
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Qtr1
-1.2
3.9
-1.4
3.2
3.6
-1.7
-0.5
7.2
3.6
0.9
3.2
2.5
0.0
2.6
Qtr2
0.5
4.1
4.9
1.2
0.9
7.3
5.6
0.6
5.6
4.5
0.3
1.8
4.1
4.3
Qtr3
0.5
1.1
3.5
4.6
2.8
-0.8
1.8
4.4
10.3
1.1
3.7
-2.1
5.8
Source: www.bls.gov
Qtr4
3.4
0.7
1.6
2.1
7.0
3.9
6.0
-0.4
-0.3
0.6
-1.1
0.2
0.8
Annual
0.5
2.7
1.6
2.8
2.9
2.8
2.5
4.1
3.7
2.8
1.8
1.0
1.4
US labor productivity growth slowed during
1974-1982, then rebounded
The growth in labor productivity declined from 2.9% per year between 1948 and 1973 to only 1.0%
between 1974 and 1982. A jump in the price of oil contributed to three recessions during that
stretch, and new environmental and workplace regulations, though necessary and beneficial, slowed
down productivity growth temporarily. The information revolution powered by the computer chip17
and the Internet has boosted productivity in recent years.
US real GDP per capita has nearly tripled since
1959
18
US real GDP per capita was highest among major economies
19