ECON 201 1st Edition Lecture 28Outline of Last Lecture I. The GDP Deflatora. Definition of the GDP deflatorII. GDP and Economic Well Beinga. Definition of real GDP per capitaIII. Why Do We Care About GDP?IV. Short Run vs. Long Run Changes in the GDPa. Definition of business cyclesb. Definition of recessionsc. Definition of depressionsV. Production and GrowthVI. Productivitya. Definition of productivityb. Definition of physical capitalc. Definition of human capitald. Definition of natural resources VII. Technological Knowledgea. Definition of technological knowledgeb. Definition of technological changeOutline of Current Lecture I. ProductivityII. Investmenta. Definition of investmentb. Definition of foreign direct investmentc. Definition of foreign portfolio investmentIII. EducationIV. Health and NutritionV. Property Rights and Political Stabilitya. Definition of property rightsVI. Free TradeVII. Research and DevelopmentVIII. Population Growtha. Stretching Natural ResourcesThese 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.b. Diluting Capital Stockc. Population Technology ProgressCurrent LectureI. ProductivityRecall that productivity is the value of the output produced per unit of labor input. This includesphysical capital per worker, human capital per worker, natural resources per worker, and technical knowledge. To understand the difference between production and productivity, look at the following problem. Rebecca produces 100 pizzas and works five hours per day. Nathaniel produces 120 pizzas and works 8 eight hours a day. Nathaniel has the greater production, because he produces 120 pizzas compared to Rebecca’s 100. However, if we compare how manypizzas they make per hour, we find that Rebecca has a greater productivity – she can produce 20pizzas in an hour while Nathaniel can only produce 15. Society has an understanding of the best ways to produce goods and services through technology. Through education, training, and experience, workers have acquired knowledge and skills, and this defines human capital. II.InvestmentInvestment is increasing physical capital by domestic investment. More capital leads to fewer consumption goods, and if you decrease consumption goods, you increase saving which funds physical capital (K). However, a tradeoff exists between current and future consumption. Policiescan also encourage investment from abroad. Foreign direct investment is a capital investment (such as a factory) owned and operated by a foreign entity. Foreign portfolio investment is a capital investment financed with foreign money but operated by domestic residents. The drawback is that some of the returns flow back to the country of origin. III.EducationPolicy can also promote investment in human capital (H). They can do this through public schools or by subsidizing loans for college. There are many positive externalities of education; inthe U.S., each year of schooling raises a worker’s wage by 10%. However, investing in H also involves an opportunity cost, as you are trading the present income for the future income. IV. Health and NutritionHealthier workers are more productive workers; this is an additional investment in human capital. In countries with significant malnourishment, raising a worker’s caloric intake raises productivity. From 1962-1965, calorie consumption rose 44% in South Korea and they experienced higher economic growth as a result. Nobel winner Robert Fogel stated that 30% of Great Britain’s growth from 1790-1980 was due to improved nutrition.V. Property Rights and Political StabilityRecall that markets allocate resources to their most efficient uses. This requires respect for property rights – the ability of people to exercise authority over the resources they own. A stable government is important for property rights to exist, as it encourages a stable constitution and law enforcement. The justice system, then, needs to enforce contracts, addressfrauds and corruption, and have effective courts. Otherwise, political instability (such asfrequent coups) creates uncertainty over whether property rights will be protected in the future. VI. Free TradeThere are two types of policies concerning free trade: inward orientated policies and outward oriented policies. Inward oriented policies are limits on investment from abroad. An example is tariffs; such countries avoid interaction with other countries. Outward oriented policies are the elimination of restrictions on trade and foreign investment. These promote integration with the world economy. VII. Research and DevelopmentTechnological progress is the main reason living standards have risen over the long run because knowledge is a public good. Some policies that have been enacted to promote technological progress include patent laws, tax incentives or direct support, private sectors for research and development, and grants for basic research at universities.VIII. Population GrowthPopulation growth may affect living standards in three different ways. 1. Stretching natural resources. In 1798, Malthus argued that population growth would strain society’s ability to provide for itself. Since then, the world population has increased six fold. If Malthus was right, living standards would have fallen. Instead, they’ve risen. How? Technological progress and productivity growth have allowed forhigher living standards.2. Diluting capital stock. The greater the population, the higher the labor, the lower productivity and living standards. This applies to human capital (H) as well as physicalcapital (K). Fast population growth results in more children and a greater strain on the educational system. Policies have been adopted to reduce population growth; they discourage it and improve technological progress and economic growth.3. Population technological progress. More people results in more scientists, inventors, and engineers. It is evident from the course of human history that growth rates increase with population. More populated regions grow faster than less population regions. However, the quote below may give some hope to the status of the world’s future population.“A somewhat more arcane milestone, meanwhile, generated no media coverage at all: Ittook humankind 13 years to add its 7 billionth. That’s longer than the 12 years it took toadd the 6 billionth—the first time in