Production and GrowthTable 1 The Variety of Growth ExperiencesECONOMIC GROWTH AROUND THE WORLDPRODUCTIVITY: ITS ROLE AND DETERMINANTSRobinson Crusoe and Economic GrowthHow Productivity Is DeterminedPowerPoint PresentationSlide 8FYI: The Production FunctionSlide 10Slide 11Slide 12Slide 13ECONOMIC GROWTH AND PUBLIC POLICYThe Importance of Saving and InvestmentFigure 1 Growth and InvestmentDiminishing Returns and the Catch-Up EffectInvestment from AbroadSlide 19EducationProperty Rights and Political StabilitySlide 22Slide 23Slide 24Slide 25Free TradeSlide 27Research and DevelopmentCASE STUDY: The Productivity Slowdown and SpeedupSlide 30Figure 2 The Growth in Real GDP Per PersonPopulation GrowthSummarySlide 34Slide 35PvertyProduction and Growth•A country’s standard of living depends on its ability to produce goods and services.•Within a country there are large changes in the standard of living over time.•In the United States over the past century, average income as measured by real GDP per person has grown by about 2 percent per year.•ProductivityProductivity refers to the amount of goods and services produced for each hour of a worker’s time.•A nation’s standard of living is determined by the productivity of its workers.Table 1 The Variety of Growth ExperiencesCopyright©2004 South-WesternECONOMIC 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.•Annual growth rates that seem small become large when compounded for many years. (Rule of 70)•Compounding refers to the accumulation of a growth rate over a period of time.PRODUCTIVITY: ITS ROLE AND DETERMINANTS•Productivity plays a key role in determining living standards for all nations in the world. •Productivity refers to the amount of goods and services that a worker can produce from each hour of work.•To understand the large differences in living standards across countries, we must focus on the production of goods and services.Robinson Crusoe and Economic Growth•Production Possibilities Frontier–Coconuts vs. fish–Tradeoffs and opportunity costs–Law of increasing costs–Growth equals shifts•Present vs. Future Consumption–Fish nets vs. fish – capital accumulation–Technology embedded in capital•Technology and Human Capital•Friday’s Arrival–Increased production but another mouth to feed–Civil strife–Laziness vs. entitlementHow Productivity Is Determined•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•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.•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.•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.•Technological Knowledge–society’s understanding of the best ways to produce goods and services. –Human capital refers to the resources expended transmitting this understanding to the labor force.FYI: The Production Function•Economists often use a production function to describe the relationship between the quantity of inputs used in production and the quantity of output from production.•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.•A production function has constant returns to scale if, for any positive number x,xY = A F(xL, xK, xH, xN)xY = A F(xL, xK, xH, xN)•That is, a doubling of all inputs causes the amount of output to double as well.•Production functions with constant returns to scale have an interesting implication.–Setting x = 1/L,–Y/ L = A F(1, K/ L, H/ L, N/ L)Y/ L = A F(1, K/ L, H/ L, N/ L)Where:Y/L = output per workerK/L = physical capital per workerH/L = human capital per workerN/L = natural resources per workerFYI: The Production Function•The preceding equation says that productivity (Y/L) depends on physical capital per worker (K/L), human capital per worker (H/L), and natural resources per worker (N/L), as well as the state of technology, (A).ECONOMIC GROWTH AND PUBLIC POLICY•Governments can do many things to raise productivity and living standards. •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.The Importance of Saving and Investment •One way to raise future productivity is to invest more current resources in the production of capital.Figure 1 Growth and InvestmentCopyright©2003 Southwestern/Thomson Learning(a) Growth Rate 1960–1991(b) Investment 1960–1991South KoreaSingaporeJapanIsraelCanadaBrazilWest GermanyMexicoUnited KingdomNigeriaUnited StatesIndiaBangladeshChileRwandaSouth KoreaSingaporeJapanIsraelCanadaBrazilWest GermanyMexicoUnited KingdomNigeriaUnited StatesIndiaBangladeshChileRwandaInvestment (percent of GDP)Growth Rate (percent)0 1 2 3 4 5 6 7 0 10 20 30 40Diminishing Returns and the Catch-Up Effect•As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns.•Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while.•In the