Macroeconomics Chapter 12

Determinants of Productivity

1. Physical capital per worker 2. Human capital per worker 3. Natural resources per worker 4. Technological knowledge

Productivity example

Economy 1: real gdp=200, L=2, productivity= 200/2=100. Economy 2: real gdp=200 L=1, productivity= 200/1=200, higher gdp, higher gdp per capita, higher standard of living

Higher GDP means

Higher standard of living. Income per capita varies with countries

Productivity

How much we are able to produce. Determines the quality of life. Productivity is the key to higher production of goods and services (GDP). High productions means higher standard of living. Y/L=output per worker. Y=real GDP and quantity of output produced, L=quantity of labor.

Human Capital Per Worker

Human capital (H): the knowledge and skills workers acquire through education, training, and experience. H/L= the average worker's human capital. Productivity is higher when the average worker has more human capital (education, skills, etc.). An increase in H/L causes an increase in Y/L. College is human capital.

Natural Resource Per Worker

Natural Resources (N): the inputs into production that nature provides, e.g. land, mineral deposits. Other things equal, more N allows a country to produce more Y. In per-worker terms an increase in N/L causes an increase in Y/L. Some countries are rich because they have abundant natural resources (e.g. Saudi Arabia has lost of oil). But countries need not have much N to be rich (e.g. Japan imports the N it needs). Having more raw materials to work with

Technological Knowledge

Society's understanding of the best ways to produce goods and services. Technology progress does not only mean a faster computer, a higher-definition TV, or a smaller cell phone. It means any advance in knowledge that boosts productivity (allows society to get more output from its resources) e.g. Henry Ford assembly line, faster computers. Provide more funding for research.

Technological Knowledge vs. Human Capital

Technological knowledge refers to society's understanding of how to produce goods and services. Human capital results from the effort people expend to acquire this knowledge. Both are important for productivity.

Physical Capital Per Worker

The stock of equipment and structures used to produce goods and services is called physical capital, denoted K. K/L=capital per worker. Productivity is higher when the average worker has more capital (machines, equipment, etc.). An increase in K/L causes an increase in Y/L. More machines for people to work on increases productivity. Policy increase savings allow banks to invest more in companies so they can buy more expenditure

Why is productivity so important

When a nation's workers are very productive, real GDP is large and incomes are high. When productivity grows rapidly, so do living standards. What, then, determines productivity and its growth rate?