Chapter8-Macro

Chapter 8Chapter 8

Productivity and GrowthProductivity and Growth

Growth and the PPFGrowth and the PPF

• What is the PPF again?– Why is it importance?

Country A -- Country A -- Size: 3/10 size of USSize: 3/10 size of US Population: 40 MillionPopulation: 40 Million Natural resources: many,Natural resources: many, Fertile land, lead, zinc, tin, etc.Fertile land, lead, zinc, tin, etc.

Rank these 4 countries, richest to Rank these 4 countries, richest to poorest:poorest:

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Country A -- Country A -- Country B -- Country B --Size: 3/10 size of USSize: 3/10 size of US Size: About the size of California Size: About the size of CaliforniaPopulation: 40 MillionPopulation: 40 Million Pop: 127 million Pop: 127 million Natural resources: many,Natural resources: many, Natural resources: few; fish Natural resources: few; fish

Fertile land, lead, zinc, tin, etc.Fertile land, lead, zinc, tin, etc.


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Country A -- Country A -- Country B -- Country B --Size: 3/10 size of USSize: 3/10 size of US Size: About the size of California Size: About the size of CaliforniaPopulation: 40 MillionPopulation: 40 Million Pop: 127 million Pop: 127 million Natural resources: many,Natural resources: many, Natural resources: few; fish Natural resources: few; fish



Country C -- Country C -- Size: 1.8 times the size of US (land mass)Size: 1.8 times the size of US (land mass)Pop: 143 million Pop: 143 million Natural Resources: tons! Oil, naturalNatural Resources: tons! Oil, natural Gas, coal, timber (vast supplies)Gas, coal, timber (vast supplies)

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Country A -- Country A -- Country B -- Country B --Size: 3/10 size of USSize: 3/10 size of US Size: About the size of California Size: About the size of CaliforniaPopulation: 40 MillionPopulation: 40 Million Pop: 127 million + Pop: 127 million + Natural resources: many,Natural resources: many, Natural resources: few; fish Natural resources: few; fish



Country C -- Country C -- Country D --Country D --Size: 1.8 times the size of US (land mass)Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger Size: 3.5 times bigger than Wash, DCthan Wash, DCPop: 143 million Pop: 143 million Pop: 4 million Pop: 4 millionNatural Resources: tons! Oil, naturalNatural Resources: tons! Oil, natural Natural Resources: not many, Natural Resources: not many, fish, Gas, coal, timber (vast supplies)fish, Gas, coal, timber (vast supplies) deep water portdeep water port

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Results:

Country A -- Country A -- Size: 3/10 size of USSize: 3/10 size of USPopulation: 40 MillionPopulation: 40 Million Natural resources: many,Natural resources: many, Fertile land, lead, zinc, tin, etc.Fertile land, lead, zinc, tin, etc.


Country A -- ArgentinaCountry A -- ArgentinaSize: 3/10 size of USSize: 3/10 size of USPopulation: 40 MillionPopulation: 40 Million Natural resources: many,Natural resources: many, Fertile land, lead, zinc, tin, etc.Fertile land, lead, zinc, tin, etc.

GDP/capita = $13,600GDP/capita = $13,600 life expectancy = 76.9 yrslife expectancy = 76.9 yrs literacy rate = 97.1 %literacy rate = 97.1 %


Country A -- ArgentinaCountry A -- Argentina Country B -- Country B --Size: 3/10 size of USSize: 3/10 size of US Size: About the size of California Size: About the size of CaliforniaPopulation: 40 MillionPopulation: 40 Million Pop: 127 million Pop: 127 million Natural resources: many,Natural resources: many, Natural resources: few; fish Natural resources: few; fish


GDP/capita = $13,600GDP/capita = $13,600 life expectancy = 76.9 yrslife expectancy = 76.9 yrs literacy rate = 97.1 %literacy rate = 97.1 %


Country A -- ArgentinaCountry A -- Argentina Country B -- Japan Country B -- JapanSize: 3/10 size of USSize: 3/10 size of US Size: About the size of California Size: About the size of CaliforniaPopulation: 40 MillionPopulation: 40 Million Pop: 127 million Pop: 127 million Natural resources: many,Natural resources: many, Natural resources: few; fish Natural resources: few; fish


GDP/capita = $13,600GDP/capita = $13,600 GDP/capita = $30,400GDP/capita = $30,400life expectancy = 76.9 yrslife expectancy = 76.9 yrs life expectancy = 81.15 yrslife expectancy = 81.15 yrsliteracy rate = 97.1 %literacy rate = 97.1 % literacy rate = 99%literacy rate = 99%






Country C -- Country C -- Size: 1.8 times the size of US (land mass)Size: 1.8 times the size of US (land mass)Pop: 143 million Pop: 143 million Natural Resources: tons! Oil, naturalNatural Resources: tons! Oil, natural Gas, coal, timber (vast supplies)Gas, coal, timber (vast supplies)

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Country C -- RussiaCountry C -- Russia Size: 1.8 times the size of US (land mass)Size: 1.8 times the size of US (land mass)Pop: 143 million Pop: 143 million Natural Resources: tons! Oil, naturalNatural Resources: tons! Oil, natural Gas, coal, timber (vast supplies)Gas, coal, timber (vast supplies)

GDP/capita = $10,700GDP/capita = $10,700life expectancy = 67.1 yrslife expectancy = 67.1 yrsliteracy rate = 99.6% literacy rate = 99.6%

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Country C -- RussiaCountry C -- Russia Country D --Country D --Size: 1.8 times the size of US (land mass)Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger Size: 3.5 times bigger than Wash, DCthan Wash, DCPop: 143 million Pop: 143 million Pop: 4 million Pop: 4 millionNatural Resources: tons! Oil, naturalNatural Resources: tons! Oil, natural Natural Resources: not many Natural Resources: not manyGas, coal, timber (vast supplies) Gas, coal, timber (vast supplies) deep water port deep water port

GDP/capita = $10,700GDP/capita = $10,700life expectancy = 67.1 yrslife expectancy = 67.1 yrs literacy rate = 99.6% literacy rate = 99.6%

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Country C -- RussiaCountry C -- Russia Country D -- SingaporeCountry D -- SingaporeSize: 1.8 times the size of US (land mass)Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger Size: 3.5 times bigger than Wash, DCthan Wash, DCPop: 143 million Pop: 143 million Pop: 4 million Pop: 4 millionNatural Resources: tons! Oil, naturalNatural Resources: tons! Oil, natural Natural Resources: not many Natural Resources: not manyGas, coal, timber (vast supplies)Gas, coal, timber (vast supplies)

GDP/capita = $10,700GDP/capita = $10,700 GDP/capita = $29,700 GDP/capita = $29,700life expectancy = 67.1 yrslife expectancy = 67.1 yrs life expectancy = 81.62 life expectancy = 81.62 yrsyrsliteracy rate = 99.6% literacy rate = 99.6% literacy rate = 92.5% literacy rate = 92.5%

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Bonus Nation

• Size: Twice the size of CA• Population: very large, 130 million +• Natural Resources: vast: oil, tin, iron ore, coal,

limestone, lead, zinc, natural gas

Bonus Nation

• Size: Twice the size of CA• Population: very large, 130 million +• Natural Resources: vast: oil, tin, iron ore, coal, limestone,

lead, zinc, natural gas

Nigeria:

• Per capital GDP: $1,400 2005• Life Expectancy: 47.08 yrs• Infant Mortality: 97.14 / 1000

What is Productivity?What is Productivity? Production

– Process– Transform resources– Intro goods and services

Productivity– Efficient use of resources– Ratio: Total output to specific input– Labor productivity

• Output per unit of labor

Labor ProductivityLabor Productivity

• Why is this important?• When does it increase?

• With human and physical capital

Per-Worker Production Function (PF)Per-Worker Production Function (PF)

• The PF shows the relationship between the amount of capital per worker in the economy and average output per worker.

• Capital deepening: an increase in the amount of capital per worker• One source of rising productivity• Contributes to labor productivity and economic

growth

LO1

Per-Worker Production Function

PF

Out

put

per

wor

ker

y

Capital per worker0 k

The per-worker production function, PF, shows a direct relationship between the amount of capital per worker, k, and the output per worker, y.

The bowed shape of PF reflects the law of diminishing marginal returns from capital: As more capital is added to a given number of workers, output per worker increases but at a diminishing rate and eventually could turn negative.

Exhibit 2

Technological ChangeTechnological Change Technology

– Better quality of capital– Increased productivity– Upward rotation of PF– Higher standard of living

LO1

Impact of a Technological Breakthrough on the Per-Worker Production Function

A technological breakthrough increases output per worker at each level of capital per worker.

Better technology makes workers more productive.

This is shown by an upward rotation of the per-worker production function from PF to PF’.

An improvement in rules of the game would have a similar effect.

Exhibit 3

PF

Capital per worker0 k

PF’

Out

put

per

wor

ker

y

y’

Two Kinds of Change in Capital Improve Worker Productivity

Two Kinds of Change in Capital Improve Worker Productivity

1) An increase in the QUANTITY of capital per worker

– Movement along the per-worker production function.

2) An improvement in the QUALITY of capital per worker

– Reflected by technological changes that rotate the PF

Rules of the GameRules of the Game

• The formal and informal institutions that promote economic activities: laws, customs, manners, etc.

• Stable political environment• Well-define property rights

Freedom IndexFreedom Index

http://www.fraserinstitute.org/research-news/display.aspx?id=16518

How do countries rate?Does it make a difference in their Economic

Growth?http://www.cato.org/pubs/efw/map/index.php



http://www.cato.org/pubs/efw/map/index.php

Productivity and Growth in Practice

Productivity and Growth in Practice

Industrial market economies– Higher standard of living– 15% of world population– Produce 75% of world’s output

Developing countries– Poor countries– Low standard of living– Less human and physical capital– Low labor productivity

Education and Economic Development

Education and Economic Development

Education– Human capital– Higher productivity

Industrial market economies– Higher education levels

Developing countries– Lower education levels

LO2

Percent of Adult Population with at Least a College Education: 2003 and 2006

Exhibit 4

U.S. Labor ProductivityU.S. Labor Productivity Annual productivity growth

• 2.1% per year, since 1870 (by 1,680%)

• Over long periods

– Small differences in productivity» Huge differences in standard of living

1948-1973: Golden days; 2.9% per year 1974-1982 Slowdown to 1%

– Oil pieces

– Legislation 1983: rebound

– Information revolution

LO2

Long-Term Trend in U.S. Labor Productivity Growth: Annual Average by Decade

Exhibit 5

LO2

U.S. Labor Productivity

Growth Slowed During

1974-1982 and Then

Rebounded

The growth in labor productivity declined from 2.9% per year between 1948 and 1973 to only 1.0% between 1974 and 1982. A jump in the price of oil contributed to three recessions during that stretch, and new environmental and workplace regulations, though necessary and beneficial, slowed down productivity growth temporarily. The information revolution powered by the computer chip and the Internet has boosted productivity in recent years.

Exhibit 6

How did computers boost productivity?

How did computers boost productivity?

1) Efficiency gains in the production of computers and semiconductors

2) Greater computer use by industry

Output per CapitaOutput per Capita Standard of living

– Output per capita– Real GDP per capita

U.S.– General upward trend– During recessions

• Decrease in productivity

International ComparisonsInternational Comparisons

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2091rank.html

Compare Angola with the United States. What is Angola’s GDP per capita, what about the

U.S.? Now what is their infant morality rates? (meaning how many babies live to see their

first birthday).Is their a quality of life difference?



Quality-of-Life Measures of Development

Quality-of-Life Measures of Development

• The GDP measures market transaction, it does not measure differences in living standards.– Demography

• Life expectancy at birth• Infant mortality rate• Illiteracy rate• Per capita energy consumption

– Economic Freedom• Freedom Index

Technological changeTechnological change

• Technological change• Job dislocations can be created- displaced workers• More affordable products, boosting both

production and employment

• “Does technological change lead to unemployment?”• NO statistical evidence of this.

Research & DevelopmentResearch & Development Basic research

General search for knowledge First step for technological advancement Yields a higher return

to society Applied research

Answer particular questions Develop specific products

R&D Spending as a Percentage of GDP for Major Economies during the 1980s, 1990s, and 2006LO

3Exhibit 10

Industrial PolicyIndustrial Policy

• Industrial policy• The idea that government, using taxes, subsidies,

regulations, and coordination of private sector could help nurture industries.

• Concerns• Government efficiency• Giveaway programs

Do Economies Converge?Do Economies Converge?

• Convergence theory• Developing countries- they can grow faster than

advanced economies• Why?

• Adopt existing technologies• Invest in human resources

• But, is it happening???

Chapter8-Macro

Business

Transcript of Chapter8-Macro