Productivity and Growth Flashcards
(25 cards)
How do we measure variations in the standard of living?
Among countries:
Average income
Quality of life: nutrition, housing , healthcare, life expectancy
Within a country: over time e.g. GDP growth
Why is there economic growth around the world?
Differences in growth rates
Poor countries not necessarily doomed to poverty forever
Rich countries can’t take their status for granted
What is productivity
Y/L
Quantity of goods and services produced from each unit of labor
Key determinant of living standards
When a nation’s workers are very productive, real GDP is large, incomes are high
Why is productivity important?
Higher productivity = higher living standards
Economy’s income = economy’s output
A nation can only enjoy a high standard of living if it can produce a large quantity of goods and services
How is productivity determined?
Production function:
Graph or equation showing relation between output and inputs
Consists of physical capital, human capital, natural resources, technological knowledge
Y = AxF(L,K,H,N)
L= quantity of output
F = function that shows how inputs are combined to produce output
A: variable that reflects available production tech
What does physical capital contain (K)
Total = K: the stock of equipment and structures that are used to produce goods and services
Per worker =K/L
When average worker has more capital (machines, equipment etc), higher productivity
Increase in K/L causes increase in productivity (Y/L)
What does human capital contain (H)
Total = H: Knowledge and skills that workers acquire through EDUCATION, TRAINING, EXPERIENCE
Per worker =H/L
When average worker has more capital (education, skills etc.), higher productivity
Increase in H/L causes increase in productivity (Y/L)
What do natural resources contain?
Total = N: Inputs into the production of goods and services that are provided by NATURE e.g. land, rivers, mineral deposits
Increase in N/L causes increase in productivity (Y/L)
What does technological knowledge contain (A)
- Society’s understanding of the BEST WAYS to produce goods and services
- Any advance in knowledge that boosts productivity and allows society to get more output from its resources
Common knowledge: everyone becomes aware of it after one person uses it
Proprietary: known only by company that discovers it
What does a production function with constant returns to scale mean?
Doubling all inputs causes the amount of output to double as well.
A production function has constant returns to scale if, for any positive number x,
xY = AF(xL, xK, xH, xN)
A doubling of all inputs would be represented in this equation by x=2
Right side: shows inputs doubling
Left side: shows outputs doubling
What is another way to see constant returns to scale?
Y/L = AF(1,K/L, H/L, N/L)
What can gov policy do to raise productivity and living standards?
. Savings and investment
* Investment from abroad
* Education
* Health
* Political stability
* Free trade
* Research and Development
* Property rights
How can savings and investment promote productivity?
Invest more current resources in production of capital
trade off: society must consume less and save more of its current income
How can investment from abroad promote productivity?
Investment by foreigners
FDI: capital investment owned and operated by a foreign entity
Foreign portfolio investment: (FPI): investment financed with foreign money, but operated by domestic residents
How can education promote productivity?
- Education is investment in human capital
- Gap between wages of educated and uneducated workers
- Opportunity cost: wages forgone
- Conveys positive externalities
- Subsidies to human-capital investment: public
education - Problem for poor countries: Brain drain
31
How can health and nutrition promote productivity?
Health care expenditure: type of investment in HUMAN capital
Healthier workers = more productive
More calories = more productivity
Vicious cycle: for countries that are poor, cannot afford healthcare + nutrition
Virtuous cycle: policies that lead to more rapid growth would naturally improve health outcomes, in turn would further promote economic growth
How can property rights and political stability promote productivity?
Protect property rights (ability of people to exercise authority over the resources they own)
Promote political stability
Problem: lack of property rights; contracts hard to enforce
Political instability: frequent revolutions, coups
creates uncertainty of whether property rights will be protected in the future
How can free trade promote productivity?
Trade can make everyone better off
Inward oriented policies: raise living standard by interacting with other countries
e.g. tariffs
Outward-oriented policies:
promote integration with world economy
(higher success rate e.g. Singapore)
Similar effects to discovering new tech; improves productivity and living standards
How can research and development promote productivity?
Technological progress
Knowledge = public good, ideas can be shared freely
Policies to promote technological progress:
- patent laws
- tax incentives/direct support for private sector R&D
grants for basic research at unis
Benefits of investment from abroad?
- Increase economy’s stock of capital
- Higher productivity, higher wages
-State-of-the-art tech developed in other countries
-Good for poor countries that cannot generate enough saving to fund investment projects themselves - Some benefits flow back to the foreign capital owners
What is diminishing marginal product?
When marginal product of an input declines as the quantity of the input increases
Production function gets flatter as more inputs are being used, slope of production function decreases
What are diminishing returns?
Benefit from an extra unit of an input declines as
the quantity of the input increases
* Diminishing marginal product
In long run, higher saving rate -> higher productivity, higher income
But this faster growth is temporary due to diminishing returns to capital
E.g. if workers already have a lot of K, giving them more increase productivity very little
But if the opposite, giving them more K increases their productivity a lot
What is the catch-up effect?
Property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
e.g. US and South Korea 1960-990
Growth >6% in South Korea
Growth 2% in USA
In 1960, K/L far smaller in Korea than USA, so Korea grew faster
Equation for productivity?
Output/labor force (no of workers)
