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Chapter 25. Production and Growth. Economic Growth around the World. Productivity and Its Determinants. Productivity. Definition : The quantity of goods and services produced from each unit of labour input. OR

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chapter 25

Chapter 25

Production and Growth

  • Definition :
    • The quantity of goods and services produced from each unit of labour input.


    • Productivity refers to the quantity of goods and services that a worker can produce from each hour of work
misconception about productivity
Misconception about productivity
  • Productivity is not about what you produce butabout how efficiently you produce it.
  • Take a small country like Switzerland with apopulation of 7 million and real GDP per capita is second in rank after US.
misconception about productivity1
Misconception about productivity

- It has no military power, no car industry, no

computer industry: among many other things, it

exports milk, chocolate, drugs, watches and has

large tourism and banking sectors

  • Swiss are rich because they produce goods and services with very high productivity
determinants of productivity
Determinants of Productivity

The four determinants of productivity are:

(1) physical capital:

is the stock of machinery,equipment and structures that are usedto producegoods and services, such as

– The machinery in oil refineries, steel mills, power plants

– Tools used to repair automobiles or to build homes

– Office buildings, schools, TV towers, etc.

determinants of productivity1
Determinants of Productivity
  • (2) human capital, is the term used by economists todefine the knowledge and skills that workingpersons in an economy acquire through education, training and experience

• Education constitutes the most important element in human capital

• Longer and better education of the citizens increasetheir ability to undertake complex tasks required in the production process

• Training usually takes place during working life and in firms

• Like physical capital, human capital raises a nation’scapacity to produce goods and services

determinants of productivity2
Determinants of Productivity

(3) natural resourcesare inputs used in production thatare provided by nature, such as agricultural land, rivers, mineral deposits, forests, etc.

• Natural resources can be divided into two major categories

– Renewable: trees, forests, hydroenergy

– Nonrenewable: petroleum, coal, other minerals

• Having a large natural resource can be anadvantage but it does not lead automatically to high productivity

• Some rich countries are poor in natural resources(Denmark, Japan, Singapore) while some poor countriesare rich in natural resources (Brazil ($11.000 GDP per capita, Iraq($4500 GDP per capita))

determinants of productivity3
Determinants of Productivity
  • (4)technological knowledge, Technological knowledge is the understanding ofthe best ways to produce goods and services

• Technological knowledge is related to but different from basic science

• A country may be well advanced in basic scienceand produce many high-tech products but still havelow real GDP per head (Soviet Union and India are good examples)

• Producing good wine (France), expensive shoes(Italy), quality cars (Germany) also correspond to advanced technological knowledge

• Human capital refers to the resources expended totransmit the technology to the labour force

the production function
The Production Function
  • Y = A f(L, K, H, N)
  • xY= A f(xL, xK, xH, xN)
  • If x=2, then 2Y = A f(2L,2K,2H,2N)
  • If x = 1/L, then Y/L = A f(1, K/L, H/L, N/L)
y a f l k h n
Y = A f(L, K, H, N)
  • Relationship between the quantity of inputs used in production
  • A is available production technology. As technology improves A rises, so economy produce more output from any given combination of inputs.
y a f l k h n1
Y = A f(L, K, H, N)
  • Y denotes the quantity of output,
  • L denotes the quantity of labour
  • K denotes the quantity of physical capital (capital)
  • H denotes the quantity of human capital
  • N denotes the quantity of natural resources.
xy a f xl xk xh xn
xY= A f(xL, xK, xH, xN)
  • Constant Returns to scale.
  • If we double allinputs, it causes the amount of output to double as well.
  • So if write the equation when x=2
  • It becomes : 2Y = A f(2L,2K,2H,2N)
x 1 l useful implication
x = 1/L, Useful Implication
  • Production funciton becomes:

- Y/L = A f( 1, K/L, H/L, N/L)

Y/L is output per worker (measure of productivity)

K/L is capital per worker

H/L is human capital per worker

N/L is natural resources per worker

productivity or output per worker y l
Productivity or Output per worker (Y/L)
  • Labour Productivity Or Output Per Worker depends on,
  • Available Production Technology,
  • Capital per worker,
  • Human capital per worker,
  • Natural resources per worker,
natural resources effect on productivity
Natural Resources’ Effect on Productivity
  • Can productivity-driven economic growth continue indefinitely, given that natural resources are limited?
  • When these shortages start to occur, won’t they stop economic growth and, perhaps,even force living standards to fall?
natural resources effect on productivity1
Natural Resources’ Effecton Productivity
  • Technological knowledge makes production more resource-efficient
  • Adjusted price of natural resources tended remain stable or in some cases even fall over long period of time
  • This shows us while supplies may be falling, demands are declining even more rapidly.
economic growth public policy
Economic Growth Public Policy
  • What can government policies do to increase productivity or raise of standard of living?

-By adopting larger,

-Capital per person

-Human Capital per person

- Technological Knowledge

saving and investment
Saving and Investment
  • In order to have larger stock of capital,
    • Save and Invest more today
    • Or Consume less today

We will discuss this issue in chapter 26.

catch up effect
Catch – Up Effect
  • Poorer countries have more to gain than richer countries.
  • Poor countries tend to grow more rapidly than rich ones.
  • This catch-up effect seems to have been important in fast-growing East Asian economies.
investment from abroad
Investment from Abroad
  • Foreign Direct Investment (FDI)
  • Foreign Portfolio Investment (FPI)
  • The World Bank (WB) raises funds in advanced countries and uses those funds to make loans in developing countries.
  • Human Capital accumulation raises productivity through education.
  • Human capital has a cost.
  • Many economist believe that human capital is more important than physical capital. Why?
health and nutrition
Health and Nutrition
  • Human Capital is also related to health of workers.
  • Improved nutrition will lead to growth in GDP.

But How?

property rights and political stability
Property Rights and Political Stability
  • A mining company will not make the effortto mine iron ore if it expects the ore to be stolen.
  • Political Instability hurts property rights and productivity.
research and development
Researchand Development
  • knowledge is a public good: That is, once one person discovers an idea,the idea enters society’s pool of knowledge
  • The U.S. government has long played a role in the creation. This helps to be very improved on rocket and plane industry.
population growth
Population Growth
  • Population growth can decrease productivity by:
  • Diluting the stock of physical and human capital
  • Stretching natural resources too thin.

On the other hand, increases in population may take technological progress more rapid, since there are more people around to discover and invent.

  • Growth rates of real GDP also vary substantially.
  • Productivity, depends on the physicalcapital, human capital, natural resources, andtechnological knowledge available to workers.
  • Government policies can try to influence theeconomy’s growth rate in many ways: byencouragingsaving and investment, fostering education, promoting R&D etc.
  • The accumulation of capital is subject to diminishingreturns.
  • Population growth has a variety of effects oneconomic growth.

1. )International data show a positive correlation between income per person and the health of the population.

  • Explain how higher income might cause better health outcomes.
  • Explain how better health outcomes might cause higher income.
  • How might the relative importance of your two hypotheses be relevant for public policy?

2.) International data show a positive correlation betweenpolitical stability and economic growth.

a. Through what mechanism could political stabilitylead to strong economic growth?

b. Through what mechanism could strong economicgrowth lead to political stability?


3.) In many developing nations, young women have lower enrollment rates in secondary school than do young men. Describe several ways in which greater educational opportunities for young women could lead to faster economic growth in these countries.


4.) How does the rate of population growth influence thelevel of GDP per person?