ECN 222 1st Edition Lecture 14Outline of Last Lecture - Production and Growth- Incomes and Growth Around the World- Production and Productivity- ProductionOutline of Current Lecture- Y= Af(L, K, H, N)- Economic Growth and Public Policy- Productivity Function- Diminishing Returns and the Catch – up Effect- Investment From Abroad- Research and Development- Population GrowthCurrent LectureY = total productionY = A f (L, K, H, N)Constant returns to scale2Y = A f (2L, 2K, 2H, 2N)Multiply by 1/LThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Y/L = output per worker, ProductivityY/L = f( K/L, H/L, N/L)Increase ProductivityTo increase productionTo increase living standardEconomic Growth and Public PolicyInstitutions- Institutional frame work of economy must be sound- Institutions are the “humanely devised constraints that structure human interaction”.o Governmentso Property Rightso Trust- Without law and order and dependable conditions significant growth will not occurProductivity FunctionY/L = AF(K/L, H/L, N/L)Saving and Investment- Boost productivity by increasing K, requires investment.- More Capital -> Fewer consumption goods- Must reduce consumption to increasing saving to fund the production of investment goods- Tradeoff between current and future consumptionRestated:Higher standards of livingMore stuffHigher ProductivityCapital AccumulationInvestmentSavingsEducation- Government can increase productivity by promoting education – investment in human capital (H)o Public schools, loans- Trade of between the present and future year in school = sacrificing year of wagesDiminishing Returns and The Catch – up Effect- The government can implement policies that raise savings and investment- K will rise, causing productivity and living standards to rise- But this faster growth is temporary due to diminishing returns to capital:As K rises the extra output from an additional unit of K fallsThe Catch- Up Effect : the property where by poor countries tend to grow more rapidly than richonesInvestment from Abroad- Can save and invest on own or government can also encourage- Foreign direct investment: a capital investment (e.g. factory) that is owned and operatedby a foreign entity- Foreign Portfolio investment: a capital investment financed with foreign money but operated by domestic residents ( largest shareholder in city port) - Some of the returns flow back to countries that supplied the fundsResearch and Development- Technological progress is the main reason why living standards rise over the long run- One reason is the knowledge is a public good: Ideas can be shared freely, increasing the productivity of many- Policies to promote technical progresso Patents lawso Tax incentives or direct support for private sector R&Do Grants for basic research at universitiesPopulation Growth….. may affect living standards in three different ways:1) Stretching natural resourcesa. 200 years ago, Thomas Malthus argued that population growth would strain society’s ability to provide for itself*Since then populations has increased sixfold- And living standards have risen!!- Technological progress and productivity growth 2) Diluting the capital stocka. Bigger population = higher L = Lower K/L = lower productivity and living standardsb. This applies to H as well as K: fast pop growth = more kids = greater strain on education systemc. Countries with fast population growth tend to have lower educational