ECN211 - Lesson 6

Why does productivity growth in high-income economies not slow down as it runs into diminishing returns from additional investments in physical capital and human capital? Does this show one area where the theory of diminishing returns fails to apply? Why or why not?

Productivity growth from new advances in technology will not slow because the new methods of production will be adopted relatively quickly and easily, at very low marginal cost. Also, countries that are seeing technology growth usually have a vast and powerful set of institutions for training workers and building better machines, which allows the maximum amount of people to benefit from the new technology. These factors have the added effect of making additional technological advances even easier for these countries.

Explain the difference between property rights and contractual rights. Why do they matter to economic growth?

Property rights are the rights of individuals and firms to own property and use it as they see fit. Contractual rights then are based on property rights and they allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance. Economic growth occurs when the standard of living increases in an economy, which occurs when jobs are being created and incomes are rising. For this to happen societies must create a legal environment that gives individuals the ability to use their property to their fullest and highest use, including the right to trade or sell that property. Without a legal system that enforces contracts, people would not be likely to enter into contracts for current or future services because of the risk of non-payment. This would make it difficult to transact business and would slow economic growth.

List the areas where government policy can help economic growth.

Public education, low investment taxes, funding for infrastructure projects, special economic zones

What are the "advantages of backwardness" for economic growth?

The advantages of backwardness include faster growth rates because of the process of convergence, as well as the ability to adopt new technologies that were developed first in the "leader" countries. While being "backward" is not inherently a good thing, Gerschenkron stressed that there are certain advantages which aid countries trying to "catch up."

invention

advances in knowledge

technology

all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products

Would the following events usually lead to capital deepening? Why or why not? 1.)A weak economy in which businesses become reluctant to make long-term investments in physical capital. 2.)A rise in international trade. 3.) A trend in which many more adults participate in continuing education courses through their employers and at colleges and universities.

1.) No. Capital deepening refers to an increase in the amount of capital per person in an economy. A decrease in investment by firms will actually cause the opposite of capital deepening (since the population will grow over time). 2.)There is no direct connection between and increase in international trade and capital deepening. One could imagine particular scenarios where trade could lead to capital deepening (for example, if international capital inflows which are the counterpart to increasing the trade deficit) lead to an increase in physical capital investment), but in general, no. 3.) Yes. Capital deepening refers to an increase in either physical capital or human capital per person. Continuing education or any time of lifelong learning adds to human capital and thus creates capital deepening.

Use an example to explain why after periods of rapid growth, a low-income country that has not caught up to a high-income country may feel poor.

A good way to think about this is how a runner who has fallen behind in a race feels psychologically and physically as he catches up. Playing catch-up can be more taxing than maintaining one's position at the head of the pack.

What do the growth accounting studies conclude are the determinants of growth? Which is more important, the determinants or how they are combined?

Capital deepening and technology are important. What seems to be more important is how they are combined.

Would you expect capital deepening to result in diminished returns? Why or why not? Would you expect improvements in technology to result in diminished returns? Why or why not?

Capital deepening, by definition, should lead to diminished returns because you're investing more and more but using the same methods of production, leading to the marginal productivity declining. This is shown on a production function as a movement along the curve. Improvements in technology should not lead to diminished returns because you are finding new and more efficient ways of using the same amount of capital. This can be illustrated as a shift upward of the production function

What policies can the government of a free-market economy implement to stimulate economic growth?

Government can contribute to economic growth by investing in human capital through the education system, building a strong physical infrastructure for transportation and commerce, increasing investment by lowering capital gains taxes, creating special economic zones that allow for reduced tariffs, and investing in research and development.

Are there other ways in which we can measure productivity besides the amount produced per hour of work?

Yes. Since productivity is output per unit of input, we can measure productivity using GDP (output) per worker (input).

technological change

a combination of invention-advances in knowledge-and innovation

infrastructure

a component of physical capital such as roads and rail systems

capital deepening

an increase by society in the average level of physical and/or human capital per person

special economic zone (SEZ)

area of a country, usually with access to a port where, among other benefits, the government does not tax trade

convergence

pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes

innovation

putting advances in knowledge to use in a new product or service

human capital

the accumulated skills and education of workers

modern economic growth

the period of rapid economic growth from 1870 onward

physical capital

the plant and equipment that firms use in production; this includes infrastructure

rule of law

the process of enacting laws that protect individual and entity rights to use their property as they see fit. Laws must be clear, public, fair, and enforced, and applicable to all members of society

production function

the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use

aggregate production function

the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita

compound growth rate

the rate of growth when multiplied by a base that includes past GDP growth

contractual rights

the rights of individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance

labor productivity

the value of what is produced per worker, or per hour worked (sometimes called worker productivity)

Industrial Revolution

the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s