GROWTH AND

PRODUCTIVITY
Chapter 11
• Growth- is a rise in amount of
goods and services an economy
produces.
• Productivity- an output per unit
of input
what is produced : what is required to produce
• Say`s law: Supply creates its own
demand, named after a French
Economist, Jean Baptiste Say.
• Say`s law justification is as follows:

People work and supply goods to the

market because they want other
goods.
Rule of 72
• Divide 72 by the annual growth rate
of income or any variable to get the
number of years over which income
or any variable will double.
Example
• If you have $100 in the bank and you're earning 5%
interest, you will have $200 in about 72/5 = 14.4 years.

• If the population in the Philippines grows at 3%, it will double

in 72/3 = 24 years.

• If you have a savings account with a principal of $1,000

and an interest rate of 6%, your savings will grow to
$2,000 in about 72/6 = 12 years.
Specialization:
• The concentration of individuals on
specific detail of production, and
division of labor, the cleavage of a
task to allow for specialization of
function.
Comparative advantage:
• The ability to be better convenient to
the production of one good than to
the production of another good.
• Per capita growth: producing more
goods and services per person
Per capita growth = % change in output - % change in population

0 = 50% - 50%
 Sources of Growth
1. Investment and accumulated capital
2. Available resources
3. Compatible institutions
4. Technological growth
5. Entrepreneurship
1. Investment and Accumulated
Capital:
• Physical capital accumulation and investment
were once seen as the key elements to
growth. This is not longer thought to be true
because:
-The empirical evidence does not support it.
-Products and processes change.
-Capital is far more than machines.
1. Investment and Accumulated
Capital:
• Human Capital: the skills that are
associated in workers through
people`s knowledge.
• Social Capital: the establishment way
of doing things that directs people in
how they approach production.
2. Available Resources
• Nations with an abundance of one type can
trade for more of another type if needed.
• Technology can create new resources and
displace others (e.g. Solar or hydrogen power
might replace gasoline as the fuel of choice in
cars, trucks, busses.)
3. Compatible Institutions:
• Those that foster growth—must have incentives built
into them that lead people to work hard and discourage
people from activities that inhibit growth.
• Private ownership of property plays an important role in
growth.
• A corporation is another example of a growth-promoting
economic institution because of limited liability.
• Many developing nations have merchantist policies
dictating governmental permission before economic
activity can take place.
4. Technological growth
• A much larger aspect of growth involves
changes in technology—changes in the goods
we buy and changes in the way we make
goods.
5. Entrepreneurship
• Consist of competitive behaviours
that drive the market process
• Serves as agents of change, bring new
ideas to the market and stimulate
growth
 Theories of Growth
• Production function: Shifts the
relationship between the quantity of
inputs used in production and the
quantity of output resulting from
production.
• Constant returns to scale: output will
increase in due proportion as all
inputs
• Increasing returns to scale: output
increases by a greater proportionate
rise than all inputs.
• Decreasing returns to scale: output
increases by a smaller proportionate
as all inputs.
The Law of Diminishing Marginal
Productivity:
• Rising one input, keeping all others
constant, will bring about smaller and
smaller gains.
The Classical Growth Model
• Classical growth model: a model of
growth that uses all efforts in the role
of capital accumulation in the growth
process.
Focus on Diminishing Marginal
Productivity of Labor
• The Classical growth model focused on how
diminishing marginal productivity of labor
placed limitations on growth.
• Economists such as Thomas Malthus said that
since land was fixed, diminishing marginal
productivity would set in as population grew.
• As output per person declines, at some point
available output would no longer be sufficient
to feed the population.
Diminishing Marginal Productivity of
Capital
• Increases in technology and capital
overwhelmed the law of diminishing marginal
productivity.
• Modern economists, such as Robert Solow,
changed the focus to the diminishing marginal
productivity of capital, not labour.
• They assumed population grows at a constant
rate.
Technology
• Technology overwhelms diminishing marginal
productivity so that growth rates can increase
over time.
• Technology is the result of investment in
creating technology (research and
development).
• Investment in technology increases the
technological stock of an economy.
The New Growth Theory
• Emphasizes the role of technology rather
than capital in the growth process.

• New Growth Theory separates

investment in capital and investment in
technology.
Technology
• Increases in technology are not as directly linked to investment
as is capital.
• Technological advances in one sector of the economy lead to
advances in completely different sectors.
• Technological advances have positive externalities or positive
effects on others not taken into account by the decision maker.
• Some basic research is protected by patents or the legal
ownership of a technological innovation that gives the owner
of the patent sole rights to its use and distribution for a limited
time.
Learning by Doing
• New growth theory also highlights learning by
doing which is improving the methods of
production through experience.
• By increasing the productivity of workers,
learning by doing overcomes the law of
diminishing marginal productivity.
Economic Politics to Embolden Per Capita
Growth
1. Policies embolden saving and investment
2. Policies to control population expansion
3. Policies to build up the level of education
4. Policies to technologically innovate
5. Policies to provide funding for research
6. Policies to maximize the economy`s openness to
trade
Policies to Embolden Saving and
Investment
• Modern growth theories have
downplayed the importance of capital in
the growth process.
• Policy makers are eager to encourage
both saving and investment.
• Canada has used tax incentives to
increase saving.
Policies to Control Population
Growth
• Developing nations whose populations are rapidly
growing have difficulty providing enough capital and
education for everyone

Policies that reduce population growth include:

• Free family–planning services.
• Increased availability of contraceptives.
• One-child-per-family policies, such as Chinaadopted in
1980.
Policies to build up the level of
education
• Increasing the educational level and skills of the
workforce increases labor productivity.
• In developing nations, the return on investments in
education is much higher than in developed nations.
• Technical training in improved farming methods or
construction is more important than higher education
in a developing country.
• In Canada, it is estimated that an additional year of
school increases a worker’s wages by an average of 10
percent.
Policies to technologically innovate
• While all agree that technology is important,
no one is sure what the best technological
growth policies are.
• Patents and protecting property rights are two
ways to encourage innovation.
• Well-developed financial institutions such as
stock markets create liquidity and encourage
investment.
Policies to provide funding for
research
• Individual firms have little incentive to do basic
research because of technology’s “common
knowledge” aspect.
• This is why the Canadian government provides
most of the funding for basic research in this
country.
- Canada’s spending on research and
development (R&D) lags other industrialized
countries.
 Policies to Maximize the Economy’s
Openness to Trade
• Free trade increases growth by
broadening the market and by fostering
competition.
• In order to specialize, you need a large
market.
• Large markets allow firms to take
advantage of economies of scale.
 Presented by:
• Mariz Del Rio
• Jung Seung Yoon(David)
• Rhenrik Lim
• Faith Estrada