Chapter 25

Production and

Growth

College of BusinessAlfaisal

UNIVERSITY

Saudi Arabia Energy

FutureToday

Production

Consumption

Selling

Buying

2030?

U.S. Energy

FutureToday

Consumption

Production

Buying

Selling

2030?

Subsidize Petrol?

Quantity

Price

Demand

Supply - Market

Qm

PmSupply - Subsidize

Qs

Ps

Too much and

too cheap

Profit attracts Innovation

Time

$ Innovation drops cost

allowing price to also drop

Price

Innovation

Innovation

Innovation

Innovation

Cost

Whales to 747s

Intellectual

Financial Physical

Human

Culture

Entrepreneur

trust knowledge skills personality health relationships

natural resources time buildings equipmentthings than make things

money and risksavers and borrowers time is money

(1+r)n

insurance   limited liability corporations

ideas technologymethods

Productivity

Outputdivided by

Input

How do we go from this...

to this?

1800 2010 Change

Population one billion seven billion 7x

Life Expectancy 26 years 66 years 40 +

GDP Per Capita Per Day $3 $30 10 x

GDP: $70,000,000,000,000 Population: 7,000,000,000GDP Per Capita: $10,000

GDP Per Capita

Source: https://www.google.com.sa/publicdata/explore?

ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=world%20gdp#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=region&ifdim=regi

on&tdim=true&hl=en_US&dl=en&ind=false

Rates and

Compounding Linear versus

Exponential

0

8

16

24

32

40

48

56

64

1 2 3 4 5 62

48

16

32

64

24

68

1012

Linear versus ExponentialAdding versus Compounding

+

^

Rule of 70sYears to Double

70Rate of Growth

70 divided by

the rate of growth

1%2%

3%

4%

5%

RateYears to Double

70 ÷ 1 = 7070 ÷ 2 = 35

70 ÷ 3 = 23.3

70 ÷ 4 = 17.5

70 ÷ 5 = 14

Size in 70 years?

2 x4 x

8 x

16 x

32 x

One word

Productivity

Why do Standards of Living

differ?

Better at making stuff

Productivity

What people want

What is Wealth?

Anything that helps you create wealth

What is Capital?

Cultural Human Physical

Intellectual Financial

Five Types of Capital

Cultural Capital

Worldview

Political

Legal

Economic

How people view and treat other

people

Expectations

Cultural Capital

Property RightsRule of Law

Political Stability No peace ... No prosperity

Cultural Capital

LadyJustice

Weight of the evidenceversus

Status of the parties

Human Capital

I look for three things in hiring people.

The first is personal integrity, the second is

intelligence, and the third is a high energy level.

But of you don’t have the first, the other two will kill

you.

- Warren Buffett, CEO, Berkshire Hathaway

Integrity Competence

Trust

Trust Knowledge and Skills Health and Nutrition Social Relationships

Human Capital

Health & Nutrition

Two types Tools

Natural Resources Water, Oil, Minerals

Physical Capital

Tools we use to make stuff

Natural Resources Renewable

Non-renewable

Physical Capital

Technology How the world works

How we make smart things and make

things smart

Intellectual Capital

Research and Development

Patent System

20 Year Monopoly on your idea

Human CapitalIntellectual Capital

Money

Allows us to store labor and shift time

Financial Capital

Savingsversus

Consumption

Spend or Save?

Save instead of consumeInvestment in new capital

Increase productivity

Three Steps

Capital Allocation

Right capital at the right time

Innovation - Productivity

Continuous Innovation

Each year in school adds 10 percent to

income

Invest versus consume

Education

More peopleSmaller slices

Grow the pie faster than population

GDPGDP

per capita

Population Growth

Population Growth

A smaller slice of a larger pie is bigger than a larger slice of a smaller pie

How you slice the pie

determines the size of

the pie

Culture

Economy

U.S. Farmers1800 - 90 percent

U.S. Farmers1900 - 45 percent

Gasoline enginesreplaced horses

U.S. Farmers2012 - 2 percent

Productivity Growth

More people

More ideas

More innovation

More wealth

Quiz

1. What are the five types of capital?

2. What is global GDP per capita?

3. If a country is growing at 5 percent, how long will it take to double GDP?

4. What is productivity?

5. Name two types of physical capital.