LECTURE 3: PRODUCTION AND GROWTH

LECTURE 3: PRODUCTION AND GROWTH
Key questions:
 Why some nations are very rich, while others are
very poor?
 Why some nations have higher growth rates than
others?
 Why some nations in East Asia become prosperous
after 30 years, meanwhile many African nations
have no signal of growth

ECONOMIC GROWTH Definition: Economic growth is the increase in the market value of the goods and services produced by an economy over time. .

ECONOMIC GROWTH Rule of 70: Number of years for variable to double = 70/annual growth rate of variable  Eg:  You deposit 30M into a bank. the annual interest rate is 7%. your account balance will be doubled after 10 years: 30 x (1+1%)10 = 60 .

CATCH-UP EFFECT  The catch-up effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. .

CATCH-UP EFFECT .

MEASURING ECONOMIC GROWTH Economic growth is conventionally measured as the percent rate of increase in real gross domestic product. Yt Yt1 gt  100% Yt1 gt: economic growth rate Y: GDPr  . or real GDP.

ROLE OF ECONOMIC GROWTH  Living standard of one nation depends on its ability to produce goods and services  Living standard increases when economy grows  Economic growth means unemployment reduces .

THE VARIETY OF GROWTH RATES .

vary significantly among nations.  The poorest countries have average levels of income that have not been seen in the United States for many decades. .ECONOMIC GROWTH AROUND THE WORLD  Living standards. as measured by real GDP per person.

 Compounding refers to the accumulation of a growth rate over a period of time.  .ECONOMIC GROWTH AROUND THE WORLD Annual growth rates that seem small become large when compounded for many years.

VIETNAM ECONOMIC GROWTH RATE (2000 .2012) .

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PRODUCTIVITY AND LONG-RUN ECONOMIC GROWTH  Productivity refers to the amount of goods and services that a worker can produce from each hour of work (output per worker)  Productivity plays a key role in determining living standards for all nations in the world.  Higher productivity is the only source of long run growth in real GDP per capita. .

. we must focus on the production of goods and services.PRODUCTIVITY AND LONG-RUN ECONOMIC GROWTH  To understand the large differences in living standards across countries.

 . . .The factors of production directly determine productivity.The factors of production: physical capital  human capital  natural resources  technological knowledge.The inputs used to produce goods and services are called the factors of production.DETERMINANTS OF PRODUCTIVITY .

Tools used to build or repair automobiles. It is an input into the production process that in the past was an output from the production process.  Office buildings.  . schools.  is the stock of equipment and structures that are used to produce goods and services. etc.  Tools used to build furniture.DETERMINANTS OF PRODUCTIVITY  Physical Capital  is  a produced factor of production.

training.DETERMINANTS OF PRODUCTIVITY  Human Capital  the economist’s term for the knowledge and skills that workers acquire through education. Eg: German after WW2 . human capital raises a nation’s ability to produce goods and services. and experience   Like physical capital.

  can be important but are not necessary for an economy to be highly productive in producing goods and services.DETERMINANTS OF PRODUCTIVITY  Natural Resources  inputs used in production that are provided by nature. Renewable resources include trees and forests. Japan .  Eg: Arab Saudi. rivers.  Nonrenewable resources include petroleum and coal. and mineral deposits. such as land.

.DETERMINANTS OF PRODUCTIVITY  Technological Knowledge  Society’s understanding of the best ways to produce goods and services.

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N) Y = quantity of output  A = available production technology  L = quantity of labor  K = quantity of physical capital  H = quantity of human capital  N = quantity of natural resources  F( ) is a function that shows how the inputs are combined. H. K. .FYI: THE PRODUCTION FUNCTION  Y = A F(L.

ECONOMIC GROWTH AND PUBLIC POLICY  Government Policies That Raise Productivity and Living Standards  Encourage saving and investment.  Promote research and development.  Encourage investment from abroad  Encourage education and training.  Promote free trade.  Establish secure property rights and maintain political stability. .

GROWTH AND INVESTMENT .