Activator Chapter 25 pg. 549
1.
2.
3.
4.
5.
What is the difference
between a rich country
and a poor country in
terms of average
income?
How are these
differences reflected in
quality of life?
How has per capita GDP
grown for U.S. citizens?
How does the average
income today compare to
the average income a
century ago?
How do growth rates vary
from country to country?
Tennis Ball Simulation
Number of
Workers
0
Total Output
0
Production at the
Margin
0
1. At what number of workers did we have the most total output?
2. At what number of workers did we have the highest increase in marginal product of labor?
3. When did we have too many workers?
Chapter 25 - Production and Growth


Production - act of creating an economic product that can satisfy a want
or need
Economic growth - the constant increase in the capacity of the economy
to satisfy the wants and needs of the members of society.
Economic Growth Around the World

Productivity – the amount of output produced for each unit of labor
input

Real GDP per person (GDP per capita) – average income per person,
shows that living standards varies from country to country

Growth rate - how rapidly real GDP per person grows in a typical year
◦ U.S. real GDP $3,752 in 1870 and $44,260 in 2006; 1.83% growth
rate per year
Productivity: its Role and Determinants

Why is productivity so important?
◦ Key determinant of living standards
◦ High production of goods and services per person leads to
high per capita real GDP = high standard of living
◦ “What can each member of our society produce relative to
another society?”
Productivity: its Role and Determinants

How productivity is determined?




Physical Capital
Human Capital
Natural Resources
Technological Knowledge
Productivity: its Role and Determinants

How productivity is determined?
1. Physical capital (capital goods)– the stock of
equipment and structures used to produce goods and
services
 Better inputs, better production levels
2. Human capital - knowledge and skills that workers
acquire through education, training, and experience
Productivity: its Role and Determinants
3.
Natural resources (land)– raw materials created by nature which are
converted into the production of goods and services
 Provided by nature, such as land, rivers, and mineral deposits
 U.S. has a large supply of land fit for agriculture
 Middle East oil supplies
◦ Renewable Resources - are natural resources that can be reproduced or
sustained
 Trees, energy (wind, solar power), livestock, etc.
◦ Nonrenewable Resources - are natural resources that are limited in supply.
 Coal, petroleum, gold, etc.
8
Productivity: its Role and Determinants
4.
Technological knowledge - society’s understanding of the best ways to
produce goods and services in light of scarcity
 Changes in farming; a small number of farmers can perform
agricultural tasks, which 200 years ago required a large number of
farmers to complete
 Pushes PPF outward and to the right
 Technology allows labor inputs to discontinue production of one
good and be made available to produce other goods and services
What is the difference between
production and productivity?
• Production – an economy’s capacity to produce “stuff”
– The physical output in the production process
– A country can produce 10 cars
• Productivity – how efficient the economy is at producing “stuff”
– How much time, people, money, etc. does it take?
– For example, 10 cars/day or 10 cars/1 worker or 10 cars/$10,000 labor cost, etc.
=
=
Economic Growth and Public Policy
◦ Saving and Investment - a society can change the amount of capital it has
through saving and investing
 Invest in capital today will raise future productivity tomorrow (capital
deepening)
 Tradeoff - devote fewer resources to produce goods and services for
current consumption
 Sacrifice consumption in the short run to enjoy higher consumption in
the long run
Diminishing Returns and the Catch-Up Effect
◦ Diminishing returns – the benefit from
an extra unit of an input declines as the
quantity of input increases
 Adding additional inputs will increase
outputs (production); over time the
rate of returns will begin to decline
◦ Catch-up effect – countries that start off
“poor” tend to experience relatively
rapid short term growth through
relatively small investments in capital
goods
 Similar to a “most-improved” student
vs. a “top-of-the class” student
 Growth in 2011:
 U.S. – 1.5%
 China – 9.5%
 India – 7.8%
 Iraq – 9.6%
India Video

http://www.youtube.com/watch?v=1k7ypB
ocrKQ
Application – The Production Function
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
Marginal
Product
of Labor
160
0
7
20
38
62
90
110
129
138
144
148
145
135
At what number of laborers does the firm experience diminishing marginal returns? ______________
At what number of laborers does the firm experience negative marginal returns? ________________
Application – The Production Function
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
0
7
20
38
62
90
110
129
138
144
148
145
135
Marginal
Product
of Labor
0
160
At what number of laborers does the firm experience diminishing marginal returns? ______________
At what number of laborers does the firm experience negative marginal returns? ________________
Application – The Costs of Production
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
0
7
20
38
62
90
110
129
138
144
148
145
135
Marginal
Product
of Labor
0
7
160
At what number of laborers does the firm experience diminishing marginal returns? ______________
At what number of laborers does the firm experience negative marginal returns? ________________
Application – The Production Function
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
0
7
20
38
62
90
110
129
138
144
148
145
135
Marginal
Product
of Labor
0
7
13
160
At what number of laborers does the firm experience diminishing marginal returns? ______________
At what number of laborers does the firm experience negative marginal returns? ________________
Application - The Production Function
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
0
7
20
38
62
90
110
129
138
144
148
145
135
Marginal
Product
of Labor
0
7
13
18
24
28
20
19
9
6
4
-3
-10
160
At what number of laborers does the firm experience diminishing marginal returns? _______6______
At what number of laborers does the firm experience negative marginal returns? ________11_______
Application - The Production Function
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
0
7
20
38
62
90
110
129
138
144
148
145
135
Marginal
Product
of Labor
0
7
13
18
24
28
20
19
9
6
4
-3
-10
160
At what number of laborers does the firm experience diminishing marginal returns? _____________
At what number of laborers does the firm experience negative marginal returns? _______________
Application - The Production Function
Inc.
Dim.
Neg.
Number
of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
1.
2.
Total
Product
0
7
20
38
62
90
110
129
138
144
148
145
135
Marginal
Product
of Labor
0
7
13
18
24
28
20
19
9
6
4
-3
-10
160
Inc.
Dim. Neg.
At what number of laborers do we observe diminishing marginal returns? _______6______
At what number of laborers do we observe negative marginal returns? _________11______
Investment From Abroad
◦ Foreign direct investment – a capital investment that is owned and
operated by a foreign country
 i.e. U.S. factory in another country, such as Nike in Vietnam
 Foreign country increases domestic GDP, but takes some income
◦ Foreign portfolio investment – financial investment by a foreign country
in a domestic country
 Chinese financial investment in U.S. company
 Foreign country expects a return on investment, takes a portion of
profit with them
Apple Video and China Bonds

http://www.youtube.com/watch?v=zqL2nS
6GljY&list=PLC3B5A63929ED29C0&inde
x=13&feature=plpp_video

http://www.youtube.com/watch?v=T1dDI
rOCbUo&list=PLC3B5A63929ED29C0&i
ndex=16&feature=plpp_video
Nike Stossel Outsourcing Video

http://www.youtube.com/watch?v=M5uY
CWVfuPQ&feature=watch-vrec

http://www.youtube.com/watch?v=5HMjq
QaWqes

http://www.youtube.com/watch?v=0VaHm
goB10E
Education
◦ Investments in human capital are at least as important as those in physical capital
 U.S. , each year of school raises a person’s wage by 10 percent
◦ One way government policy can enhance the standard of living is through policies
to promote education
 Creates positive externalities – the effect of one person’s actions on the wellbeing of a bystander
◦ Brain Drain – emigration of many of the most highly educated workers to rich
countries
 Leaves native country worse off
 Reduces the human capital of native country
Health and Nutrition
◦ Healthier workers are more productive
◦ Public policy aimed toward improving health of a nation can raise the
standard of living
◦ Height is an indicator of health and productivity of a nation
 North Korean’s are 6 inches shorter than South Korean’s
Google Video
http://www.youtube.com/watch?v=z8wqS7VkAcw&list=PL259C0982150A872C
&index=9&feature=plpp_video
Property Rights and Political Stability
◦ Property rights and political stability create confidence in
businesses and individuals
◦ Property rights – ability to own and control resources
◦ Political stability – refers to a government that is secure and
reliable
Free Trade
◦ Inward-oriented policies – increase productivity and living
standards within the country by avoiding interaction with the rest
of the world
◦ Outward-oriented policies – international trade and globalization
can benefit the well-being of the economy
Research and Development
◦ Technological progress has a major impact on living standards
◦ Governmental policies aimed at creating technological knowledge can
improve the productivity and standard of living of a nation
 U.S. – funding for NASA aerospace, USDA farming methods, clean energy
research
 Research grants - National Science Foundation, National Institutes of
Health
 Tax breaks incentives for firms to research and develop
 Patent system provides incentives for individuals to engage in research
Population Growth
◦ Larger population, larger labor force, consumer base and pool of human
capital
◦ Diluting Capital Stock – strain on capital for countries with large
population growth
◦ Developed countries tend to have a slower population growth than that
of undeveloped countries
 U.S and Western European about 1% per year
 African countries grow 3% per year
1
2
3
Paper Airplane Simulation
1.
2.
3.
With a group of four, you will form a country that builds paper airplanes.
As a group, agree on a simple design. Your airplanes must be made of an
8 ½ x 11 piece of paper.
Next choose your country’s name. This will be printed on both sides of the
plane’s fuselage.
Shift 1
Materials:
1 Pencil
2 desks
20 sheets of paper
Procedure: Each worker must
work alone to make his or her
airplanes. The materials must
be shared. Each worker must
test their own airplanes. One
of your workers the quality
control manager (who cannot
participate) should inspect the
airplanes and record the data.
Shift 2
Materials:
1 Pencil
2 desks
20 sheets of paper
Procedure: Before this shift
begins, work as a group to
break the production process
into a series of steps.
- Folding the paper
- Writing the Company Name
Record the results.
Shift 3
Materials:
Using the costs listed on the
productivity chart, decide as a
group what additional capital
goods you will purchase. You
have $10.00. You may acquire a
maximum of 4 desks, 40 sheets
of paper and 10 pencils. (You
can also hire a new laborer –
QCM)
Procedure: Before this shift
begins, determine the most
efficient manner of producing
the airplanes
Shift 1
Number of airplanes
completed
Number of workers
Cost of materials (.25
per sheet)
Wages ($2.00 per
worker)
Factory Rent ($2.00
per desk)
Investment in Capital
Goods
(.25 per pencil,
Cell Phone $10.00)
Total Costs (Lines
3 – 6)
Cost per airplane
Total Time Worked
Output per minute
Productivity Per
Worker
Shift 2
Shift 3
Paper Airplane Simulation Reflection Questions
1.
2.
3.
4.
5.
6.
7.
What shift were you most productive?
Why were you most productive during that
shift?
What effect did investing in additional capital
goods in shift 3 have on productivity?
What investment allowed your group the most
growth? Explain
Why did your group experience periods of nonproductivity?
If instead of making an additional capital
investment in shift 3, what would have
happened if the company laid off one or two
workers, how would that have affected
production?
How could new technology have affected your
productivity?
Article – A Picture is Worth a Thousand
Statistics, pgs. 552-553
Describe the following about three countries listed in the article:
GDP per person
People living in poverty
Education
Survival rate, ages 65-84
How do each of the pictures represent the standard of living for
each country?
Measuring Capital, pgs. 558 - 559
1.
2.
3.
4.
5.
6.
7.
8.
9.
What is the difference between the
productivity of a Mexican worker in their
native country and one that migrates to the
United States?
Why are they more productive?
What is defined as natural capital + produced
capital according to World Bank’s
environmental economics department?
What are the intangible factors of wealth?
What constitutes the largest share of wealth
in virtually all countries?
Why are rich countries rich according to
this?
What is the average score of the 30
wealthiest countries?
Why are natural resources more valuable in
rich countries?
How is it possible for a country to have
negative intangible capital?
Promoting Human Capital, pg. 564
What did Vandelson
Andrade use to spend
his time doing instead of
attending class?
2. What gave him the
incentive to show up for
class?
3. How are Latin American
countries trying to
improve their human
capital?
4.
How is the government
program changing the
health of their family?
1.
Chapter 25 Mankiw Review
1.
a. Northcountry, because it has the largest real GDP per person.
b. Eastcountry, because it has the largest growth rate.
c. Westcountry is the poorest and probably has the least capital.
d. No. Because of diminishing returns to capital, the additional
growth from increasing capital declines as a country has more
capital.
e. Human capital emits a positive externality, which can benefit the
masses. R&D can become a public good also benefiting the
masses.
f. Westcountry, because it is currently the poorest and could easily
benefit from additional capital. It may have trade restrictions
(inward oriented policies), a corrupt or unstable government, few
courts and a lack of established property rights, etc.
g. ($15,918 – $15,468)/$15,468 = 0.029 = 2.9%
Chapter 25 Mankiw Review
2. a. Cook = labor, diploma = human capital, recipes = technological
knowledge/human capital, stove and utensils = physical capital,
rabbit meat = land/natural resources.
b. Recipes (technological knowledge/human capital) never wear out.
Laborers die. The stove and utensils wear out slowly. The rabbit
meat is used up (although it is probably renewable).
3. a. Encourage saving and investment, investment from abroad,
education, free trade, research and development, protect property
rights and establish political stability.
b. Property rights and political stability are necessary for there to
be any incentive to save, invest, trade, or educate.
Homework Review: List the concept that would best describe each of the
scenarios below and explain how it relates:
1.
India experienced a rapid growth of 9% real per capita GDP growth rate from 2009 to 2010, while the
United States only experienced a 2% growth rate.
◦ Catch Up Effect.
◦ Explanation - India experienced a larger growth rate than that of the United States relative to their
status as an underdeveloped nation. While India may have experienced a larger growth rate in
2009, it was due at least in part to the catch-up effect, which states that it is easier for a country to
grow fast if it starts out relatively poor.
2.
Nike sets up a factory in Vietnam to produce shoes.
1. Foreign Direct Investment
2. A foreign direct investment was made when Nike put a part of their business in Vietnam. This
added to the GDP of Vietnam and the GNP of the United States.
3.
China invests 4 trillion dollars in the South Korean Won.
1. Foreign Portfolio Investment
2. A foreign portfolio investment was made when China invested their money in government bonds
for South Korea. This makes funds available for the country that borrows and allows for investment
in capital goods. China’s motivation for this would be a return on their investment in the way of
profit.
4.
The United States makes student loans available to prospective U.S. college students at a low rate of
3.2% interest.
1. Investment in education
2. Investments in education are one of the most important aspects of improving the productivity of a
nation. Human capital is a way for an economy to improve its productivity, its per capita real GDP
and thus its standards of living. The U.S. makes available educational opportunities in order to
Homework Review: List the concept that would best describe each of the
scenarios below and explain how it relates:
5.
Google allows their workers to work out for free at their facility. The workers are
also privy to full course meals, which are paid for by Google.
1. Health and Nutrition
2. Studies have shown that healthier workers are more productive. Google provides
many fringe benefits to their workers in order to increase their productivity. This
will lead to the growth of their company .
6.
North Korean's are typically 6 inches shorter than their South Korean counterparts.
1. Health and Nutrition
2. Studies show a correlation between height and nutrition. Taller workers are
generally more productive because they are healthier. If North Korea directed
policies at improving their nutrition would potentially see a response in increased
productivity and ultimately growth.
Homework Review: List the concept that would best describe each of the
scenarios below and explain how it relates:
7.
In portions of Iraq, their is the looming threat of kidnappings upon American
employees and their families.
1. Property Rights and Political Stability
2. Investments in a country, either direct or portfolio, are in large part related to the
stability in the political and justice system. If American’s feel the well-being of
their families and businesses are at risk, they will be unlikely to invest in the
country.
8.
The 2002 United States Steel Tariff imposed a 30% tariff on a variety of imported
steel products for a period of three years.
1. Free Trade – Inward-Oriented Policies
2. Countries that wish to protect infant-industries or domestic companies will at
times impose tariffs on imported products. The U.S. steel tariff was an example of
a tariff to dissuade companies from importing cheaper goods from other
countries.
Homework Review: List the concept that would best describe each of the
scenarios below and explain how it relates:
9.
In the late 1970's, Sri Lanka reduced quantitative control of imports in their country in order
to stimulate their economy.
1. Free Trade – Outward-Oriented Policies
2. Countries that wish to stimulate their economy can do so by adopting policies geared
towards globalization. Sri Lanka’s loosening of policies over imports of goods was an
example of the gains that can be made from trade.
10.
The U.S. government provides a 20 million dollar grant to a biotechnology company in order
find viable alternatives to typical fuel sources.
1. Research and Development
2. R&D is an important way for countries to experience improved products and innovation.
Innovation is the improvement of an existing technology, which can increase the output
per unit of labor. This can increase productivity and growth of a nation. The U.S. aims
many of its policies towards R&D as a way to improve the living standards of its people.
11.
China has an important role in the global economy as a result of the number of people in
their country.
1. Population
2. At times, the sheer number of people in a country can have an effect on productivity.
The larger the population, the larger the pool of human capital. China’s role in the global
economy is in part due to their large consumer base of over a billion people. In addition,
they have many resources that have made them a major player in the global economy.
Binder Check
Chapter 25 Review
2. North Korea Video
Questions
3. Notes
4. Daily Tens
1.
Extra Credit
1.
2.
3.
4.
Fill out the following table:
Number of
workers
Total
Output
Marginal
Output
0
0
0
1
5
2
11
3
18
4
20
5
21
6
19
At what point do diminishing returns take place
in the above table?
At what point do negative returns take place?
Draw a production function that would resemble
the above concept.
Economic Growth and Public Policy pgs. 560-572
Poster Requirements:
1) Title 2) Picture 3) Content

Group 1 – Saving and Investment
Capital, tradeoffs, scarce resources, capital accumulation, saving and investing and growth

Group 2 – Diminishing Returns and the Catch-up Effect
Saving, capital goods, productivity, GDP growth, diminishing returns, diminishing returns and saving rate, catch-up
effect, example from book; U.S. and South Korea, and school

Group 3 – Investment From Abroad
Investment by foreigners, Ford example, foreign direct investment and foreign portfolio investment, effect of
investment from abroad, GDP, GNP, growth, influence on technology, World Bank and IMF)

Group 4 – Education
Investment in human capital, schooling and wages, opportunity cost, positive externalities, educated persons, brain
drain

Group 5 – Health and Nutrition
Healthy workers, economic growth and nutrition, Great Britain example, height and malnutrition, South Korea
example, taller workers, Sub-Saharan Africa, health and wealth

Group 6 – Property Rights and Political Stability
Property rights, division of production, market prices and invisible hand, mining company example, justice system in
developed and undeveloped nations, political instability, economic prosperity and political stability

Group 7 – Free Trade
Inward-oriented policies, infant-industry argument, outward-oriented policies, Argentina Philadelphia example,
geography and trade

Group 8 – Research and Development
Technological knowledge and living standards, examples of technology, private research and public goods, research
and development, government and technology, Air Force and NASA example, government advances in knowledge,
patent system as an incentive

Group 9 – Population and Growth
Importance of a large population, Stretching natural resources, Malthus’ argument /logic and the fallacy of his
argument, population and growth, population and human capital, population around the world, China population
control, children and opportunity cost, population and technological progress, population and technological advance,
Michael Kremer argument