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    2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in hole or in part, e!cept "or use as

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    %eventh &dition

    Macroeconomics

    Principles of

    N. Gregory Mankiw

    CHAPTER

    12

    Production

    and Growth

    W

    ojciechGerson(1831-1

    901)

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    In this chapter,

    look for the answers to these questions

    What are the facts about living standards andgrowth rates around the world?

    Why does productivity matter for livingstandards?

    What determines productivity and its growthrate?

    How can public policy affect growth and livingstandards?

    2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in hole or in part, e!cept "or use as

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    33

    A typical family with all their possessions in the

    U.K., an advanced economy

    A typical family with all their possessions in the

    U.K., an advanced economy

    G! per capita" #$%,&'&

    (hild mortality rate" &)*+

    High school enrollment" -+

    G! per capita" #$%,&'&

    (hild mortality rate" &)*+

    High school enrollment" -+

    av

    id.ee

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    3.I14W5.4

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    44

    A typical family with all their possessions in Mexico, a

    middle income country

    A typical family with all their possessions in Mexico, a

    middle income country

    G! per capita" #'*,$&

    (hild mortality rate" ')%+

    High school enrollment" 6'+

    G! per capita" #'*,$&

    (hild mortality rate" ')%+

    High school enrollment" 6'+

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    55

    A typical family with all their possessions in Mali,

    a poor country

    A typical family with all their possessions in Mali,

    a poor country

    G! per capita" #',&9&

    (hild mortality rate" '6)%+

    High school enrollment" $'+

    G! per capita" #',&9&

    (hild mortality rate" '6)%+

    High school enrollment" $'+

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    ter

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    l8men7elp

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    66

    GDP percapita, 2012

    Growth rate,19702012

    (hina #,:$$ 6)*+

    ;ingapore #%',-&$ 9)6+India #$,-6% $)$+

    ew ealand #$:,:' ')9+

    1rgentina #'6,'6 ')9+

    ;audi 1rabia #$',6: '):+

    (had #',9$ &)%+

    Incomes

    and Growth

    Around the

    World

    FACT 1:

    2here arevastdifferencesin living

    standardsaround theworld)

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    77

    GDP percapita, 2012

    Growth rate,19702012

    (hina #,:$$ 6)*+

    ;ingapore #%',-&$ 9)6+India #$,-6% $)$+

    ew ealand #$:,:' ')9+

    1rgentina #'6,'6 ')9+

    ;audi 1rabia #$',6: '):+

    (had #',9$ &)%+

    Incomes

    and Growth

    Around the

    World

    FACT 2:

    2here isalso greatvariationin growth

    rates acrosscountries)

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    Incomes and Growth 1round the World

    ;ince growth rates vary, the country rankings canchange over time"

    !oor countries are not necessarily doomed to

    poverty forever, e)g) ;ingapore incomes were

    low in '%& and are quite high now)

    .ich countries can@t take their status for

    granted" 2hey may be overtaken by poorer but

    faster/growing countries)

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    !!

    Incomes and Growth 1round the World

    Auestions" Why are some countries richer than others?

    Why do some countries grow quickly while

    others seem stuck in a poverty trap? What policies may help raise growth rates and

    long/run living standards?

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    "#"#

    !roductivity

    .ecall one of the 2en !rinciples from (hap) '" A countrys standard of living depends on its ability to produce g&s.

    2his ability depends on productivity,

    the average quantity of gBs producedper unit of labor input)

    YC real G! C quantity of output produced

    LC quantity of laborso productivity CY8LDoutput per workerE

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    """"

    Why !roductivity Is ;o Important

    When a nation@s workers are very productive,real G! is large and incomes are high)

    When productivity grows rapidly, so do livingstandards)

    What, then, determines productivity and itsgrowth rate?

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    "2"2

    !hysical (apital !er Worker

    .ecall" 2he stock of equipment and structuresused to produce gBs is called Fphysicalcapital,denoted K)

    K8LC capital per worker)

    !roductivity is higher when the average workerhas more capital Dmachines, equipment, etc)E)

    i)e),

    an increase in K8Lcauses an increase inY8L)

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    "3"3

    Human (apital !er Worker

    Human capitalDHE"the knowledge and skills workers acquirethrough education, training, and eperience

    H8LC the average worker@s human capital

    !roductivity is higher when the average workerhas more human capital Deducation, skills, etc)E)

    i)e),

    an increase in H8Lcauses an increase inY8L)

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    "4"4

    >atural .esources !er Worker

    Natural resourcesDNE" the inputs into productionthat nature provides, e)g), land, mineral deposits

    5ther things equal,more Nallows a country to produce moreY)

    In per/worker terms,an increase in N8Lcauses an increase inY8L)

    ;ome countries are rich because they have

    abundant natural resourcesDe)g), ;audi 1rabia has lots of oilE)

    ut countries need not have much Nto be richDe)g),

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    "5"5

    2echnological Jnowledge

    Technological no!ledge" society@sunderstanding of the best ways to produce gBs

    2echnological progress does not only meana faster computer, a higher/definition 2K,

    or a smaller cell phone)

    It means any advance in knowledge that boostsproductivity Dallows society to get more output

    from its resourcesE) e)g), Henry Lord and the assembly line)

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    "6"6

    2ech) Jnowledge vs) Human (apital

    2echnological knowledge refers to society@sunderstanding of how to produce gBs)

    Human capital results from the effort peopleepend to acquire this knowledge)

    oth are important for productivity)

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    "7"7

    2he !roduction Lunction 2he production function is a graph or equation

    showing the relation between output and inputs" Y C AFDL, K, H, NE

    FD Eis a function that shows how inputs are

    combined to produce outputMAN is the level of technology

    MAN multiplies the function FD E,so improvements in technology Dincreases in MANEallow more output DYE to be produced from anygiven combination of inputs)

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    ""

    2he !roduction Lunction

    2he production function has the propertyconstant returns to scale" (hanging all inputsby the same percentage causes output to changeby that percentage) Lor eample,

    oubling all inputs Dmultiplying each by :Ecauses output to double"

    Y C AFDL, K, H, NE

    :Y C AFD:L, :K, :H, :NE

    Increasing all inputs '&+ Dmultiplying each by ')'Ecauses output to increase by '&+"

    ')'Y C AFD')'L, ')'K, ')'H, ')'NE

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    "!"!

    2he !roduction Lunction

    If we multiply each input by '8L, thenoutput is multiplied by '8L"

    Y8L C AFD', K8L, H8L, N8LE

    2his equation shows that productivityDoutput per workerE depends on"

    the level of technology DAE

    physical capital per worker

    human capital per worker

    natural resources per worker

    Y C AFDL, K, H, NE

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    A C T I V E L E A R I G 1

    iscussion question

    Which of the following policies do you think wouldbe most effective at boosting growth and livingstandards in a poor country over the long run?

    a" 5ffer ta incentives for investment by local firms

    #" N N N N N by foreign firms

    c" Give cash payments for good school attendance

    d" (rack down on govt corruption

    e" .estrict imports to protect domestic industries

    $" 1llow free trade

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    2"2"

    %C&N&'(C )*&+TH

    AN, -./L(C -&L(CY

    >et, we look at the ways

    public policy can affect

    long/run growth in productivityand living standards)

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    2222

    ;aving and Investment

    We can boost productivity by increasing K,which requires investment)

    ;ince resources scarce, producing more capitalrequires producing fewer consumption goods)

    .educing consumption C increasing saving)2his etra saving funds the production ofinvestment goods)

    (More details in the next chapter.)

    Hence, a tradeoff between current and futureconsumption)

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    2323

    iminishing .eturns and the (atch/=p 3ffect

    2he govt can implement policies that raisesaving and investment) (Details in next chapter.)2hen Kwill rise, causing productivity and livingstandards to rise)

    ut this faster growth is temporary,due to diminishing returns to capital"

    1s Krises, the etra output from an additionalunit of KfallsO)

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