Chapter 7: Production and Growth

Foreign portfolio investment

An investment that is financed with foreign money but operated by domestic residents Example: an American might buy stock in a Mexican corporation, and the corporation can use the proceeds from the stock sale to build a new factory.

World Bank & the International Monetary Fund

These international organization obtain funds from the world's advanced countries, such as the United States, and uses these resources to make loans to less developed countries so that they can invest in roads, sewer systems, schools, and other types of capital. It also offers the countries advice about how the funds might best be used.

Outward-oriented policies

integrate the country into the world economy; A country that eliminates trade restrictions will, therefore, experience the same kind of economic growth that would occur after a major technological advance.

Education

investment in human capital

Just as government has a role in providing a public good such as national defense,

it also has a role in encouraging the research and development of new technologies.

Externality

the effect of one person's actions on the well-being of a bystander. An educated person, for instance, might generate new ideas about how best to produce goods and services. If these ideas enter society's pool of knowledge so that everyone can use them, then the ideas are an external benefit of education.

Brain drain

the emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living.

In the long run,

the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables.

Natural resources

the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits; comes in two forms: Renewable and nonrenewable.

Human capital

the knowledge and skills that workers acquire through education, training, and experience. Usually refers to education, but it can also be used to describe another type of investment in people: expenditures that lead to a healthier population.

Catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

Diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases; In other words, when workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly.

Productivity

the quantity of goods and services produced from each unit of labor input; determinants include physical capital, human capital, natural resources, and technological knowledge.

Physical capital (or just capital)

the stock of equipment and structures that are used to produce goods and services; capital is a produced factor of production. That is, capital is an input into the production process that in the past was an output from the production process. Thus, capital is a factor of production used to produce all kinds of goods and services, including more capital.

Inward-oriented policies

these policies attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world. bad

What has been the approximate long-run growth rate of real GDP per person in the United States? Name a country that has had faster growth and a country that has had slower growth.

1.80%; Brazil has a faster growth rate and the UK has a slower growth rate.

What does the level of a nation's GDP measure? What does the growth rate of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate? List and describe four determinants of productivity. In what way is a college degree a form of capital? Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving? Does a higher rate of saving lead to higher growth temporarily or indefinitely? Why would removing a trade restriction, such as a tariff, lead to more rapid economic growth? How does the rate of population growth influence the level of GDP per person? Describe two ways the U.S. government tries to encourage advances in technological knowledge. Chapters

??

Promoting Technological Progress

If there are more people, then there are more scientists, inventors, and engineers to contribute to technological advance, which benefits everyone.

The difference between technological knowledge and human capital?

Technological knowledge refers to society's understanding about how the world works. Human capital refers to the resources expended transmitting this understanding to the labor force; technological knowledge is the quality of society's textbooks, whereas human capital is the amount of time that the population has devoted to reading them. Workers' productivity depends on both.

What is the opportunity cost of education (physical capital)

When students are in school, they forgo the wages they could have earned as members of the labor force.

Production function

Y= AF(L,K,H,N) Y: quantity of output L: the quantity of labor K: the quantity of physical capital H: the quantity of human capital, N: the quantity of natural resources F( ): a function that shows how the inputs are combined to produce output A: a variable that reflects the available production technology Example: xY=AF(xL, xL, xH, xN) would be a doubling of all inputs by x=2

How long does the higher rate of growth last? Assuming that the saving rate remains at its new, higher level, does the growth rate of GDP stay high indefinitely or only for a period of time?

because of diminishing returns, an increase in the saving rate leads to higher growth only for a while.

Patent

gives the inventor a property right over her invention, turning her new idea from a public good into a private good. By allowing inventors to profit from their inventions—even if only temporarily—the patent system enhances the incentive for individuals and firms to engage in research.

Diluting the Capital Stock

high population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly. In other words, when population growth is rapid, each worker is equipped with less capital. A smaller quantity of capital per worker leads to lower productivity and lower GDP per worker.

List and describe four determinants of a country's productivity.

physical capital, human capital, natural resources, technological knowledge

Foreign investment in Mexico

raises the income of Mexicans (measured by GNP-the income earned by residents of a country both at home and abroad) by less than it raises the production in Mexico (measured by GDP-the income earned within a country by both residents and nonresidents).

Technological knowledge

society's understanding of the best ways to produce goods and services; for example: it is common​ knowledge, after one person uses it, everyone becomes aware of it- the assembly-line.

Foreign direct investment

A capital investment that is owned and operated by a foreign entity. Example: Ford Motor Company might build a car factory in Mexico

Political stability

economic prosperity depends in part on political prosperity. A country with an efficient court system, honest government officials, and a stable constitution will enjoy a higher economic standard of living than a country with a poor court system, corrupt officials, and frequent revolutions and coups.

Public good

once one person discovers an idea, the idea enters society's pool of knowledge and other people can freely use it

Property rights

refer to the ability of people to exercise authority over the resources they own; ex: a mining company will not make the effort to mine iron ore if it expects the ore to be stolen.