Chapter 25 "Production and Growth"

Foreign direct investment

Investment made by a foreign company in the economy of another country.

labor force participation rate (L/pop)

Labor Force / Population The percentage of the population that joins the labor force.

c/pop equation

(1-s)(L/pop)(Y/L) (1-s)=proportion of national income consumed (L/pop)=labor force participation rate (Y/L)=Labor productivity

Productivity growth equation

%∆Y/L=%∆A + α%∆K/L %∆Y/L- productivity growth %∆A - total factor productivity growth α%∆K/L- capital per worker growth

Growth rate for production fuction

%∆Y=%∆A + α%∆K + (1-α)%∆L α- share of output that goes to owners of capital Y- output growth A- TFP growth α%∆K- capital growth (1-α)%∆L- labor growth

What are the Determinants of productivity?

(1)physical capital (2)human capital, (3)natural resources (4)technological knowledge

Only way to really impact well-being of society is

*increase* Y/L

Was Thomas Malthus (1766-1834) correct in his forecast about the future?

- No, population has since increased sixfold and the standard of living around the world are on average much higher -economic growth resulted in less chronic hunger and malnutrition than in Malthus' day -his prediction described the world he lived in but not the world we currently live in.

Free trade

- international trade in g&s can improve the economic well-being of a country's citizen

raising productivity by making investments from abroad

-Investment by foreigners can raise productivity -when foreigners invest in a country, they expect to earn a return on their investment -event though some of the benefits from this investment flow back to the foreign owners, this investment does increase the economy's stock of capital, leading to higher productivity and higher wages. -one way that poor countries learn state-of-the-art technologies used in more developed countries. EX: Ford's car factory increases the Mexican capital stock and, therefore, increases Mexican productivity and Mexican GDP. Yet Ford takes some of this additional income back to the United States in the form of profit. EX: Similarly, when an American investor buys Mexican stock, the investor has a right to a portion of the profit that the Mexican corporation earns.

Increase productivity via property rights and political stability

-One threat to property rights is political instability -revolutionary gov't confiscating capital (as in communist revolution), there is doubt about whether property rights will be respected in the future -leads to less incentive to save, invest, and start new businesses (high risk of it getting stolen) -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.

Conclusion Chapter 25

-a country's standard of living depends on its ability to produce goods and services. -policymakers want to encourage growth in living standards aim to increase their nation's productive ability

Increasing productivity via health and nutrition

-healthier people are more productive - increase in health leading to change in makeup of a country: higher calorie --> taller people and height is correlated to productivity, especially pronounced in poorer countries

raising productivity via savings and investment

-invest more in capital, consume less and save more of its current income -requires society sacrifice consumptions of g&s in the present to enjoy higher consumption in the future -fewer resources needed to make consumption goods and more resources available for capital goods

Education

-investment in human capital, at least as important as investment in physical capital (k/L) for a country's long-run economic success -there is an opportunity cost (being in school instead of earning a wage)

What can the gov't do to raise productivity and living standards? (Nine ways)

1. Savings and Investment 2.Diminishing returns and the catch-up effect 3.Investment from abroad 4.Education 5.Health and Nutrition 6. Property rights and political stability 7. Free Trade 8. Research and Development 9. Population Growth

Why hasn't convergence happened?

1. institutional failures hurt development (corrupt gov't officials, education) *driving factor* 2. Environmental: exploited natural resources by other countries (climate and infectious disease, geography) 3. International trade: countries that are closed may harm economy 4. Conditional convergence- can occur w/ great institutions

Sources of economic growth

1. technology 2. capital 3. labor 4. national resources 5. management and entrepreneurship

Rule of 70

70/percentage growth rate=doubling time in years

externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

crowding out

A decrease in investment that results from government borrowing Actions by the government may "crowd out" actions by the private sector. The typical example in macroeconomics is when government borrowing to finance a budget deficit uses up some of the economy's saving and crowds out investment.

Consumption

C=(1-s)Y -needed to understand well-being of people in a specific country Y- real gdp/income s- fraction of income saved C-consumption

Capital stock and Investment... Which is the flow and which is the stock?

Capital stock is the stock while investment is the corresponding flow.

asian tigers

Collective name for South Korea, Taiwan, Hong Kong, and Singapore-nations that became economic powers in the 1970s and 1980s.

Michael Kremer believes that: (related to population growth)

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

private good

Goods that are both excludable and rival in consumption Benefits and services over which the owner has full control of their use.

public good

Goods, provided or secured by the state, available to society and which no private person or organization can own. Goods that are neither excludable nor rival in consumption

Raising productivity via population growth

Most direct effect is on the labor force: -large population, larger workforce -also means more people to consume, larger population need not mean higher standard of living

raising productivity via research and development

Primary reason that living standards are higher today than they were a century ago is that technological knowledge has advanced. -public good -patent system promotes research, gives inventor a property right over her invention, turning idea from a public good to a private good

Explain why living standards vary so much around the world.

Productivity explains why incomes are so much higher in some countries than in others -dependent on a countries ability to produce G&S

Technological knowledge vs Human capital

Tech knowledge refers to society's understanding about how the world works. Human capital refers to the resources expended transmitting this knowledge to the work force Metaphor: tech knowledge is the quality of society's textbook while human capital is the amount of time that the population has devoted to reading them. Worker productivity depends on both

conditional convergence

Tendency among countries with similar steady state levels of output-poorer countries grow faster than richer countries thus for poor and rich countries to converge in income

labor productivity (Y/L)

Y/L=national income/#workers

Equation for economic growth

Y=A*f(K,L) Y- real gdp L-labor A- total factor productivity (TFP) K- capital -natural resources are not part of A

total factor productivity

a scale factor that that reflects the portion of growth that is not accounted for by explicit factor inputs (e.g. capital and labour) -intangible thing, educated workers, things that have an impact but hard to quantify

property rights

ability of people to exercise authority over the resources they own

Malthusian

adjective: Of or relating to Thomas Robert Malthus, or to his theory that population tends to increase at a faster rate than its means of subsistence and, unless it is checked by moral restraint or by disease, famine, war, or other disaster, widespread poverty and social degradation inevitably result.

foreign portfolio investment

an investment that is financed with foreign money but operated by domestic residents

Thomas Malthus (1766-1834) argued that

ever-increasing population would continually strain society's ability to provide for itself. Man-kind doomed to forever live in poverty -only check on population growth was "misery and vice" -attempts by charities or gov'ts to alleviate poverty were counterproductive

Knowledge is a public good. Explain.

once a person discovers an idea, the idea enters the societal pool of knowledge and other people can freely use it

inward-oriented policies

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

outward-oriented policies

policies that integrate countries into the world economy

Technological knowledge (A)

society's understanding of the best ways to produce goods and services - some technology is common knowledge -other technology is proprietary- known only by company that discovered it

Benefits of large population as it relates to technology.

some economists think that the world population growth has been an engine of technological progress and economic prosperity. -if there are more people, then there are more scientists, inventors, and engineers to contribute to technological advances, which benefits everyone

Describe the modern theory of diluting the capital stock. (this is really long. just read the facts)

some modern theories of economic growth emphasize its effects on capital accumulation. -high population growth reduces GDP per worker because rapid growth in the number of workers force the capital stock to be spread more thinly. -each worker is equipped with less capital which leads to lower productivity and lower GDP per worker -this is apparent in human capital, large strain on the education system due to large volume of school-aged children... not surprised that there is low educational attainment in countries with large populations -rapid growth makes it harder to provide workers with tools and skills needed to achieve high level of productivity

stock vs flow

stock = quantity measured at a point in time vs flow = quantity measured per unit time

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.

Natural resources (N/L)

the inputs into the production of g&s that are provided by nature, such as land, rivers, and mineral deposits -differences in natural resources are responsible for differences in standard of livings across the world -important but not necessary for an economy to be highly productive in producing g&s. --> Japan, one of richest countries in the world, despite having few natural resources

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich -small amounts of capital investment can substantially raise these workers' productivity Ex: From 1960 to 1990, the United States and South Korea devoted a similar share of CDF to investment. Yet over this time, the United States experienced only mediocre growth of about 2 percent, while South Korea experienced spectacular growth of more than 6 percent.

Diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases - 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

Productivity

the quantity of goods and services produced from each unit of labor input

human capital (H/L)

the skills and knowledge gained by a worker through education, training and experience -producing human capital requires inputs in the form of teachers, libraries, and student time. Indeed, students can be viewed as "workers" who have the important job of producing the human capital that will be used in future production.

Physical capital (or just capital) (K/L)

the stock of equipment and structures that are used to produce goods and services -capital is an input into the production process that in the past was an output from the production process

Consumption/population (C/pop)

way to gauge standard of living, can they pay for basic necessity