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2011-09-271ChapterProductionandGrowth25Economic Growth Around the World•Real GDP per person–Living standard–Vary widely from country to country•Growth rate–How rapidly real GDP per person grew in the typical year•Because of differences in growth rates–Ranking of countries by income changes substantially over time2TableThevarietyofgrowthexperiences1Country Period Real GDP per personat beginning of periodReal GDP per personat end of periodGrowth rate(per year)JapanBrazilChinaMexicoGermany1890–20061900–20061900–20061900–20061870–2006$1,408 7296701,0852,045$33,150 8,8807,74011,410 31,830 2.76%2.392.342.242.043yCanadaArgentinaUnited StatesIndiaUnited KingdomIndonesiaBangladeshPakistan1870–20061900–20061870–20061900–20061870–20061900–20061900–20061900–20062,2242,1473,7526324,50283458369034,61015,39044,260 3,80035,5803,9502,3402,5002.041.881.831.711.531.481.321.222011-09-272Productivity: its Role and Determinants•Productivity–Quantity of goods and services–Produced from each unit of labor input•Why productivity is so important–Key determinant of living standards–An economy’s income is the economy’s output4Productivity: its Role and Determinants•How productivity is determined–Physical capital•Stock of equipment and structures•Used to produce goods and servicesHitl–Human capital•Knowledge and skills that workers acquire through education, training, and experience5Productivity: its Role and Determinants•How productivity is determined–Natural resources•Inputs into the production of goods and services•Provided by nature, such as land, rivers, and mineraldepositsmineral deposits–Technological knowledge•Society’s understanding of the best ways to produce goods and services62011-09-273•Population growth & Standard of living growth –is it sustainable?•Argument–Natural resources ‐will eventually limit how much theworld’seconomiescangrowAre natural resources a limit to growth?the worlds economies can grow–Technological progress ‐often yields ways to avoid these limits–Improved use of natural resources–Recycling7•Are these efforts enough to permit continued economic growth?•Prices of natural resources–Scarcity ‐reflected in market pricesNtliAre natural resources a limit to growth?–Natural resource prices•Substantial short‐run fluctuations•Stable or falling ‐over long spans of time–Our ability to conserve these resources•Growing more rapidly than their supplies are dwindling•Market prices ‐no reason to believe that natural resources are a limit to economic growth8Economic Growth and Public Policy•Saving and investment•Raise future productivity–Invest more current resources in the production of capital–Trade‐off•Devote fewer resources to produce goods and services for current consumption92011-09-274Economic Growth and Public Policy•Diminishing returns and the catch‐up effect•Higher savings rate–Fewer resources –used to make consumption goods–More resources ‐to make capital goods–Capital stock increases–Rising productivity–More rapid growth in GDP10Economic Growth and Public Policy•Diminishing returns and the catch‐up effect•Diminishing returns–Benefit from an extra unit of an input–Declines as the quantity of the input increases•In the long run; higher savings rate–Higher level of productivity–Higher level of income–Not higher growth in productivity or income11FigureOutputperWorkerIllustratingtheproductionfunction112.Whentheeconomyhasahighlevelofcapital,anextraunitofcapitalleadstoasmallincreaseinoutput.12OutputperWorkerThisfigureshowshowtheamountofcapitalperworkerinfluencestheamountofoutputperworker.Otherdeterminantsofoutput,includinghumancapital,naturalresources,andtechnology,areheldconstant.Thecurvebecomesflatterastheamountofcapitalincreasesbecauseofdiminishingreturnstocapital11.Whentheeconomyhasalowlevelofcapital,anextraunitofcapitalleadstoalargeincreaseinoutput.2011-09-275Economic Growth and Public Policy•Diminishing returns and the catch‐up effect•Catch‐up effect–Countries that start off poor–Tend to grow more rapidly than countries that start off rich•Poor countries–Low productivity–Even small amounts of capital investment•Increase workers’ productivity substantially13Economic Growth and Public Policy•Diminishing returns and the catch‐up effect•Rich countries–High productivity–Additional capital investment•Small effect on productivity •Poor countries–Tend to grow faster than rich countries14Economic Growth and Public Policy•Investment from abroad–Another way for a country to invest in new capital–Foreign direct investmentCitlittthtiddtdb•Capital investment that is owned and operated by a foreign entity–Foreign portfolio investment•Investment financed with foreign money but operated by domestic residents152011-09-276Economic Growth and Public Policy•Education –Investment in human capital–Gap between wages of educated and uneducated workersif–Opportunity cost: wages forgone–Conveys positive externality•Problem for poor countries–Brain drain16Economic Growth and Public Policy•Health and nutrition –Healthier workers –more pro