LECTURE 3: PRODUCTION AND GROWTH

LECTURE 3: PRODUCTION AND GROWTH

Key questions: Why some nations are very rich, while others are

very poor? Why some nations have higher growth rates than

others? Why some nations in East Asia become prosperous

after 30 years, meanwhile many African nations have no signal of growth

ECONOMIC GROWTHDefinition:Economic growth is the increase in the market value

of the goods and services produced by an economy over time.

ECONOMIC GROWTH Rule of 70:Number of years for variable to double = 70/annual

growth rate of variable

Eg: You deposit 30M into a bank, the annual interest

rate is 7%, your account balance will be doubled after 10 years: 30 x (1+1%)10 = 60

CATCH-UP EFFECT

The catch-up effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.

CATCH-UP EFFECT

MEASURING ECONOMIC GROWTH Economic growth is conventionally measured as

the percent rate of increase in real gross domestic product, or real GDP.

gt: economic growth rateY: GDPr

ROLE OF ECONOMIC GROWTH Living standard of one nation depends on its ability

to produce goods and services

Living standard increases when economy grows

Economic growth means unemployment reduces

THE VARIETY OF GROWTH RATES

ECONOMIC GROWTH AROUND THE WORLD Living standards, as measured by real GDP per

person, vary significantly among nations.

The poorest countries have average levels of income that have not been seen in the United States for many decades.

ECONOMIC GROWTH AROUND THE WORLD Annual growth rates that seem small become large

when compounded for many years. Compounding refers to the accumulation of a

growth rate over a period of time.

VIETNAM ECONOMIC GROWTH RATE(2000 - 2012)

PRODUCTIVITY AND LONG-RUN ECONOMIC GROWTH

Productivity refers to the amount of goods and services that a worker can produce from each hour of work (output per worker)

Productivity plays a key role in determining living standards for all nations in the world.

Higher productivity is the only source of long run growth in real GDP per capita.

PRODUCTIVITY AND LONG-RUN ECONOMIC GROWTH

To understand the large differences in living standards across countries, we must focus on the production of goods and services.

DETERMINANTS OF PRODUCTIVITY- The inputs used to produce goods and services are

called the factors of production.- The factors of production directly determine

productivity.- The factors of production:

physical capital human capital natural resources technological knowledge.

DETERMINANTS OF PRODUCTIVITY Physical Capital

is a produced factor of production. It is an input into the production process that in the past was

an output from the production process.

is the stock of equipment and structures that are used to produce goods and services. Tools used to build or repair automobiles. Tools used to build furniture. Office buildings, schools, etc.

DETERMINANTS OF PRODUCTIVITY Human Capital

the economist’s term for the knowledge and skills that workers acquire through education, training, and experience Like physical capital, human capital raises a nation’s ability to

produce goods and services.

Eg: German after WW2

DETERMINANTS OF PRODUCTIVITY Natural Resources

inputs used in production that are provided by nature, such as land, rivers, and mineral deposits. Renewable resources include trees and forests. Nonrenewable resources include petroleum and coal.

can be important but are not necessary for an economy to be highly productive in producing goods and services.

Eg: Arab Saudi, Japan

DETERMINANTS OF PRODUCTIVITY Technological Knowledge

Society’s understanding of the best ways to produce goods and services.

FYI: THE PRODUCTION FUNCTION Y = A F(L, K, H, N)

Y = quantity of output A = available production technology L = quantity of labor K = quantity of physical capital H = quantity of human capital N = quantity of natural resources F( ) is a function that shows how the inputs are

combined.

ECONOMIC GROWTH AND PUBLIC POLICY

Government Policies That Raise Productivity and Living Standards Encourage saving and investment. Encourage investment from abroad Encourage education and training. Establish secure property rights and maintain political

stability. Promote free trade. Promote research and development.

GROWTH AND INVESTMENT