Productivity & Economic Growth

Why Productivity Matters!

GDP & Standard of Living• Standard of living depends on a country’s ability to

produce goods & services– Real GDP per person has ↑ 2 % per year in USA over last 100 years!

QtyFood

Qty Shelter

. B

. A

. C

(100, 0)

(0,100)

(50,50)

(100, 0)

(0,100)

(50,50)To ↑ Standard of LivingPPF curve must shift right!

Productivity per worker must rise!

Real Growth Per Worker

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GDP Per Worker % (per capita) Growth Rate

Productivity = Efficiency• Productivity refers to the amount of output (goods &

services) produced from each unit of input (labor, physical capital, etc)

– largely determines standard of living– rising productivity leads to rising wealth

Standardof Living

Productivity(efficiency)

↑ More goods produced with same resources

Determinants of Productivity• Factors of production determine productivity:

• Physical capital• Human capital• Natural resources• Technological knowledge

USA has led theworld in technology/

Internet Led to strong GDP growth in 1980’s & 90’s

Are Robotics are future?

Critical Factors for real GDP Growth

• Property rights – are a prerequisite for a market system to work

• Savings & Investment– Gov’t incentives to save & promote business investment (I)

• Research & Development: – Most technological advance comes from private research by

firms/individual inventors

• Educated workforce:– necessary for today’s high technology economy

Diminishing Returns of Capital

Outputper worker

1

1

Capital perworker

1. When the economy has a low level of capital, anextra unit of capital leads to a large increase in output.

2. When the economy has ahigh level of capital, anextra unit of capital leads toa small increase in output.

As the stock of physical capital rises, the extra output produced from an additional unit of capital falls.

Hard for USAto increaseProductivity

GDP & Gov’t Policy

• Gov’t policies to raise productivity:– Encourage saving & investment– Encourage investment from abroad.– Encourage education/training– Establish property rights & political stability– Promote free trade– Promote research and development

Encourage = PROVIDE INCENTIVES to:• start new business

• improve human capital•raise productivity

http://www.pbs.org/newshour/bb/business/july-dec13/jobs_09-06.html

What type of Jobs are being created & Shrinking Labor Force