Chapter 8: Productivity & Growth

Capital goods

Goods that produce other goods

Labor productivity

Output per unit of labor; measured as real GDP divided by hours of labor employed to produce that output`. Can be measured by any resource, such as labor, capital, or natural resources

What are 3 ways for a person's standard of living to grow?

1) increases in the amount and quality of resources (labor supply or capital stock) 2) better technology 3) Improvements in the rules of the game that facilitate production and exchange

Group of Seven (G-7)

7 industrial market economies

Talk about the political environment and productivity

A stable political climate can benefit productivity and a less stable political climate can hurt productivity (causing the graph to rotate downward)

How is the standard of living measured?

Amount of goods and services available on average per person

Describe the Law of Diminishing Marginal Returns

As more capital is added to a given number of workers, output per worker increases but at a diminishing rate and could turn negative.

Why do economists pay attention to long-term growth?

B/c although there are recessions/periods of lost productivity, it can be made up in later periods and the cumulative power of productivity growth

2 groups of goods

Capital and consumer

What resource is most responsible for increasing labor productivity? What are the two major groups?

Capital- human capital and physical capital

In poorer countries, which is more costly- capital or labor?

Capital. Labor is so much cheaper and often substitutes for capital

Describe U.S labor productivity within the past 140 years

Constantly increasing and averaging about 2.6% since 1996. Golden years (above 2% were during WWII). During 70s/80s growth stalled b/c oil prices jumped b/c of OPEC actions, boosting inflation and contributing to stagflation and 3 recessions. Also, legislation to protect environment/improve workplace safety slowed growth of labor productivity

Developing countries

Countries with a low living standard b/c of less human and physical capital per worker. Most tend to be farmers, and these farmers tend to use more primitive and therefore less productive methods

Industrial Market Countries

Developed countries (16% of world pop). Economically advanced capitalist countries of W. Euro, North America, Australia, New Zealand, and Japan, plus newly industrialized Asian economies of Taiwan, S. Korea, Hong Kong, and Singapore

Rules of the game

Formal and informal institutions that promote economic activity: laws, customs, manners, conventions, and other institutional elements that encourage people to undertake productive activity

How can technological change encourage economic growth?

Free up resources for other uses, improve quality of capital, enhance productivity of any resource.

In general terms, why does the economy grow?

Greater availability of resources, improvement in the quality of resources, technological change that makes better use of resources, or improvements in the rules of the game that enhance production.

Why are computers important to productivity?

Help people work together. Improve quality and safety of industries. can reprogram machines to increase versatility. They boost productivity through 1) efficiency gains in production of computers/semiconductors 2)greater computer use by industry

What is the argument against industrial policy?

How do gov'ts know which industries will do well? Some believe markets will allocated scarce resources better than gov'ts. Could become a giveaway program and those that are politically connected will get the money

Discuss technological change and its affect on the Per-Worker Production function

Improves QUALITY of capital and another source of increased productivity. Upward rotation of PP function.

What two kinds of changes in capital improve worker productivity?

Increase in QUANTITY of capital per worker, and improvement in QUALITY of capital per worker

Why is the per-worker production function a positive increasing function?

Increase in capital helps each worker produce more output

Capital deepening

Increase in the amount of capital per worker, one source of rising labor productivity and contributes to labor productivity and economic growth

An economy that produces more capital this year is said to_____

Invest more in capital. So people must give up some consumer goods. Opportunity cost of more capital goods this year is few consumer goods. Save more now than consume

Describe the importance of education when it comes to productivity

It allows workers to use resources efficiently and makes workers more aware of the latest production techniques and more receptive to new approaches and methods

According to the textbook, what is their rebuttal against the argument that technological change causes unemployment?

It will cause hardships and job losses in the short run but in the long run will end up in higher real incomes/leisure/higher standard of living. Also because human wants are unlimited displaced workers usually find jobs producing other goods and services demanded in a growing economy

What resource is the most commonly used to measure productivity? Why?

Labor- accounts for most production cost- about 70% on average. More easily measured than other inputs and there's more stats readily available

In the U.S., which is more costly- capital or labor?

Labor. So capital often substitutes for labor

Productivity

Measures how efficiently resources are employed. Ratio of a specific measure of output, such as real GDP, to a specific measure of input, such as labor; in this case productivity measures real GDP per hour of labor. Usually an "average"

How is economic growth depicted in the PPF curve?

Outward shift

Compare/contrast basic and applied research

Payoff less immediate w/ basic research b/c technological breakthroughs may/may not have commercial possibilities, yet basic research yields a higher return to society as a whole than applied research

Arguments against convergence

Poorest 1/3rd of world has growth rate of 1% while rest of world has 2.5% so they are already falling behind. Consumption has grown so slowly b/c birthrates are double and so more output is required. And poorer countries have low literacy rates and simply do not have the human capital and stable institutions/infrastructure

What is production?

Process that transforms resources into goods and services.

Per-worker production function

Relationship b/w amount of capital per worker in the economy and average output per worker. Amount of labor, level of technology, rules of the game are constant. Capital per worker on x-axis, output per worker on y-axis

What produces output?

Resources coupled with technology

What is the fruit of R&D? Do businesses or gov'ts do more basic research or applied research?

Technological change/improvement and therefore increased productivity. Businesses target applied research while gov'ts/universities are about basic research that may be helpful in the long run

What is the most productive combination when it comes to labor productivity?

The combination of human and physical capital

What is the single most important determinant of a nation's standard of living in the long run?

The productivity of their resources

Basic research

The search for knowledge w/out regard to how that knowledge will be used

Convergence theory

Theory predicting that the standard of living in economies around the world will grow more similar over time, with poorer countries eventually catching up with richer ones

When concerning the production possibilities frontier, what is assumed to stay fixed?

Time period (usually a year), quantity of resources in economy, level of technology, rules of the game that facilitate production and exchange

What is clustering?

When firms in the same industry are densely located in one area to promote healthy competition and allow a flow of information and cooperation b/w firms. the competition promotes regional innovation and growth

Applied research

research that seeks answers to particular questions or to apply scientific discoveries to develop specific products

Finish this saying: Investment can't occur without _______

saving

Industrial policy

the view that gov't- using taxes, subsides, and regulations- should nurture the industries and technologies of the future, thereby giving these domestic industries an advantage over foreign competition