ECON 112 - Chapter 12 - Production and growth

GDP An economy's income...

... is the economy's output

Foreign direct investment

A capital investment that is owned and operated by a foreign entity

Foreign portfolio investment

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

Productivity

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

Human Capital per Worker

*human capital* the knowledge and skills that workers acquire through education, training, and experience *ex:* skills accumulated in early childhood programs, grade school, high school, college, and on-the-job training for adults in the labor force *ex:* 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.

Free trade

*inward-oriented policies/protectionism* Domestic firms often advance the infant-industry argument, claiming they need protection from foreign competition to thrive and grow. Most economists today believe that poor countries are better off pursuing *outward-oriented policies* that integrate these countries into the world economy The amount that a nation trades with others is determined not only by government policy but also by geography (i.e. sea, rivers, etc).

Natural Resources per Worker

*natural resources* the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits Natural resources take two forms: renewable and nonrenewable Differences in natural resources are responsible for some of the differences in standards of living around the world

Physical Capital per Worker

*physical capital* the stock of equipment and structures that are used to produce goods and services capital is a *factor of production* used to produce all kinds of goods and services, including more capital

Technological Knowledge

*technological knowledge* society's understanding of the best ways to produce goods and services Some technology is common knowledge—after one person uses it, everyone becomes aware of it (ex: Henry Ford producing system) Other technology is proprietary—it is known only by the company that discovers it (ex: Coca-Cola recipe) Still other technology is proprietary for a short time (ex: pharmacology, new drug for a while) //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. To use a relevant metaphor, 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.//

How to increase productivity?

If today the economy produces a large quantity of new capital goods, then tomorrow it will have a larger stock of capital and be able to produce more goods and services. Hence, consume less save more Less consumption goods, and more capital goods = rising productivity, rise in GDP

Education

Investment in human capital Human capital investment is good because of positive externalities (*ex:* An educated person, for instance, might generate new ideas about how best to produce goods and services). *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.

Property Rights and Political Stability

Market economies achieve the coordination needed to make transactions through market prices *Property rights* refer to the ability of people to exercise authority over the resources they own. Through the criminal justice system, the courts discourage theft. In addition, through the civil justice system, the courts ensure that buyers and sellers live up to their contracts. One threat to property rights is political instability. *ex:* Food aid For decades, aid workers, journalists and others have documented cases where food aid has been misappropriated by armed groups who use it to feed their soldiers and buy weapons. Convoy trucks and other equipment are often captured.

Research and Development

The primary reason that living standards are higher today than they were a century ago is that technological knowledge has advanced. knowledge is a public good: 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. another way in which government policy encourages research is through the patent system.

INVESTMENT FROM ABROAD

When Ford opens its car factory in Mexico, some of the income the factory generates accrues to people who do not live in Mexico. As a result, foreign investment in Mexico raises the income of Mexicans (measured by GNP) by less than it raises the production in Mexico (measured by GDP). investment from abroad is one way for poor countries to learn the state-of-the-art technologies developed and used in richer countries.

Health and Nutrition

healthier workers are more productive (looking at the height of the population) Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth.

Determinants of productivity

physical capital human capital natural resources technological knowledge

Catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich *ex:* When a school gives an end-of-year award to the "Most Improved" student, that student is usually one who began the year with relatively poor performance. Students who began the year not studying find improvement easier than students who always worked hard.

Diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases an increase in the saving rate leads to higher growth only for a while *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*

Population Growth

the size of the labor force: A large population means more workers to produce goods and services a large population means more people to consume those goods and services. *Stretching Natural Resources* Malthus argued that an ever-increasing population would continually strain society's ability to provide for itself. As a result, mankind was doomed to forever live in poverty. As a result of economic growth, chronic hunger and malnutrition are less common now than they were in Malthus's day. *Diluting the Capital Stock* effects on capital accumulation. high population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly Countries with high population growth have large numbers of school-age children *Promoting Technological Progress* Some economists have suggested that world population growth has been an engine of technological progress and economic prosperity. A large population, Kremer concludes, is a prerequisite for technological advance.