Productivity &
Economic Growth
Why Productivity Matters!
GDP & Standard of Living
• Standard of living depends on a country’s ability to
produce goods & services
– Real GDP per person has ↑ 2 % per year in USA over last 100 years!
Qty
Food
.
(0,100)
.
.
C
To ↑ Standard of Living
PPF curve must shift right!
B
(50,50)
A
Productivity per worker must rise!
(100, 0)
Qty
Shelter
Real Growth Per Worker
GDP Per Worker
%
(per capita) Growth Rate
-
-
Productivity = Efficiency
• Productivity refers to the amount of output (goods & services)
produced from each unit of input (labor, physical capital, etc)
– largely determines standard of living
– rising productivity leads to rising wealth
Productivity ↑
(efficiency)
More goods
produced with
same resources
Standard
of Living
Determinants of Productivity
• Factors of production determine productivity:
•
•
•
•
Physical capital
Human capital
Natural resources
Technological knowledge
Are Robotics are future?
USA has led the
world in technology/
Internet
Led to strong GDP growth
in 1980’s & 90’s
Critical Factors for real GDP Growth
• Property rights
– are a prerequisite for a market system to work
• Savings & Investment
– Gov’t incentives to save & promote business investment (I)
• Research & Development:
– Most technological advance comes from private research by
firms/individual inventors
• Educated workforce:
– necessary for today’s high technology economy
Diminishing Returns of Capital
As the stock of physical capital rises, the extra output produced from
an additional unit of capital falls.
Hard for USA
to increase
Productivity
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
GDP & Gov’t Policy
• Gov’t policies to raise productivity:
–
–
–
–
–
–
Encourage saving & investment
Encourage investment from abroad.
Encourage education/training
Establish property rights & political stability
Promote free trade
Promote research and development
Encourage = PROVIDE INCENTIVES to:
•
•
start new business
improve human capital
• raise productivity
What type of Jobs are being created & Shrinking Labor Force
http://www.pbs.org/newshour/bb/business/july-dec13/jobs_09-06.html