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Economics Dr.

Katie Sauer

Chapter 6 Reading Guide: Productivity and Human Capital I. Human Capital To understand poverty, economists start with the concept of human capital. Human Capital is:

If someone took away all of your assets (job, money, home, etc) and left you on a street corner, what types of skills and abilities make up your own personal human capital?

How is the labor market similar to the market for goods and services?

How does the price of a certain skill compare with the social value of the skill?

Use the Nobel Prize vs pro baseball salary example to explain how economists think about labor:

Some human capital is natural ability, much of human capital is built through investing in education and training. Go back to your list of your personal human capital attributes. Indicate which ones are natural ability and which you have acquired or developed through education and training. Human capital is an economic passport. Explain:

Economics Dr. Katie Sauer

Why are fast food workers paid a relatively low wage?

The problem that underlies poverty is a lack of human capital. - The poverty rate for high school dropouts is ________times the rate for college graduates. - One of the reasons that India is a poor nation because ________% of the population is illiterate - Many of the homeless in the US suffer from _____________________________________ which makes acquiring human capital difficult.

Explain the relationship between the economy, human capital and the ability to find a good job.

Thought Experiment: 100,000 high school dropouts vs 100,000 top graduates

How does the NWAC plant-closing compare with typical mill/factory/mine/plant-closings?

Explain the Lump of Labor Fallacy:

Farming Community example:

Economics Dr. Katie Sauer

Human capital is about more than earning more money. Some of the other benefits are:

Explain the relationship between total human capital and the standard of living for society.

There is a strong correlation between a countrys level of human capital and its economic wellbeing. Natural resources are not correlated with a countrys standard of living. Japan & Switzerland:


Saudi Arabia & Israel:

The reason human capital matters so much for the economy is because it is a major component of productivity and productivity is ultimately what determines the standard of living. II. Productivity Productivity is:

Productivity is determined by ___________________ and ________________________________. - Of the two determinants, _________________________________ is more important.

Why is America rich?

Examples: In 1870 it took about _________ hours to buy a households annual food supply. Today it takes about ________ hours. The average work week has fallen from _________ hours to _________ hours while GDP per capita has increased from _________ to __________. 3

Economics Dr. Katie Sauer

Explain why Ross Perot was wrong about the giant sucking sound that would come from NAFTA.

Why has America lost industries like manufacturing textiles and shoes?

What was the overall effect of NAFTA on US jobs?

Productivity growth is what improves our standard of living. If productivity grows at 2% per year, then we will become _______% richer each year. Explain why.

An interesting economic debate is whether or not the US economy has undergone a sharp increase in productivity growth. Alan Greenspan says:

Robert Gordon says:

From 1947 to 1975, productivity grew at _______ % per year on average. From 1975 to the mid-1990s, productivity grew at _______ % per year on average. From 2000 to 2008, productivity grew at _______ % per year on average. The Rule of 72 says: 72 / a growth rate = how many years the quantity will take to double. Example: If productivity is growing at 2.7% per year, then it will take 72/2.7 = 26.7 years for the standard of living to double. Example: If a bank account pays 4% interest, then it will take 72/4 = 18 years for the principal to double. Productivity growth makes the US richer, regardless of how fast other economies are growing. (Productivity growth is not a zero-sum game.) India Example:

Economics Dr. Katie Sauer

Productivity growth depends on investment. Investment in Human Capital Physical Capital Research and Development Effective Government Institutions Whenever investments are made, consumption in the present must be sacrificed. Examples:

Productivity growth also depends on: the legal, regulatory and tax structures example: social factors example: innovation and technological progress example:

III. Other Applications of Human Capital and Productivity Economic History: In the 18th century, Thomas Malthus predicted that as societies grew richer, they would also become more populous and the food supply would not be able to keep up. Explain how increases in productivity caused an alternative outcome.

Fertility Rates: Why do people in poor nations have more children than people in rich nations? Explain.

IV. Income Inequality: In the US, the poorest 20% of households were earning only 2% more in 2004 than they were in 1979. The richest 20% of households were earning 63% more in 2004 than they were in 1979. Explain this using what youve learned about human capital.

Economics Dr. Katie Sauer

Explain what is happening to the gap between rich and poor in the US. Explain why.

The US economy is evolving in ways that favor skilled workers. Examples:

Explain how international trade makes US workers that are high-skilled better off and can make US workers that are low-skilled worse off.

Given the above, which do you think is a better long-term solution for helping low-skilled US workers: shelter them from international competition by restricting trade or help them to increase their human capital? Explain.

There is disagreement about the degree to which various other factors are responsible for the gap in wages. Unions: Hours worked: Performance pay:

Two arguments for why the gap in income equality isnt too worrisome: 1) powerful signals

2) standard of living is rising

Economics Dr. Katie Sauer

Two arguments for why the gap in income might be a problem: 1) relative wealth matters to people

2) if the gap gets too large

V. Looking Forward Does the free market system make poverty inevitable? Must there be economic losers if there are economic winners? Explain.

In theory, a world in which every individual was educated, healthy and productive would be a world in which everyone lived comfortably. Explain how this could be true.

___________________________________________________________________________________ In your own words, summarize the main points of this chapter.