Productivity &
Economic Growth
Why Productivity Matters!
Production and Growth
• 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)
.
.
Goal is to get
PPF curve to shift
right!
C
B
(50,50)
A
(100, 0)
Qty
Shelter
Productivity
• Productivity refers to the amount of output (goods & services)
produced from each unit of input (labor, physical capital)
– largely determines standard of living
Productivity ↑
Standard
of Living
Determinants of Productivity
• Factors of production determine productivity:
•
•
•
•
Physical capital
Human capital
Natural resources
Technological knowledge
USA has led the
world in technology/
Internet
Led directly to
Strong GDP growth
in 1980’s & 90’s
without inflation
Critical Factors for 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 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