Production and

Growth

Imelda B. Cueto

CCC
 At the end of the discussions, students will
have understanding on…

What are the facts about living standards and

growth rates around the world?
Why does productivity matter for living standards?
What determines productivity and its growth rate?
How can public policy affect growth and living
standards?
 GDP (Nominal) Ranking 2018
GDP
(Nominal) GDP per capita (Nominal) ($)
Rank Country/ (billions of Growth Continent
Economy $) (%)

2018 2018 Rank

United
1 States 20,412.87 2.27 62,152 9 North America
2 China 14,092.51 6.86 10,088 72 Asia
3 Japan 5,167.05 1.71 40,849 25 Asia
4 Germany 4,211.64 2.51 50,842 17 Europe
United
5 2,936.29 1.79 44,177 23 Europe
Kingdom
6 France 2,925.10 1.85 44,934 21 Europe
7 India 2,848.23 6.74 2,135 142 Asia
8 Italy 2,181.97 1.47 35,914 27 Europe
9 Brazil 2,138.92 0.98 10,224 71 South America
 GDP
(Nominal) GDP per capita (Nominal) ($)
Country/ (billions of Growth
Rank $) Continent
Economy (%)
2018 2018 Rank
11 Russia 1,719.90 1.55 11,947 65 Europe
12 Korea 1,693.25 3.09 32,775 29 Asia
13 Spain 1,506.44 3.05 32,559 31 Europe
14 Australia 1,500.26 2.27 59,655 11 Oceania
15 Mexico 1,212.83 2.04 9,723 74 North America
16 Indonesia 1,074.97 5.07 4,052 116 Asia
17 Netherlands 945.33 3.11 55,185 13 Europe
18 Turkey 909.89 7.05 11,114 68 Asia
19 Saudi Arabia 748.00 -0.74 22,650 42 Asia
20 Switzerland 741.69 1.07 86,835 2 Europe
 GDP
(Nominal) GDP per capita (Nominal) ($)
Country/ (billions of Growth
Rank Economy $) (%) Continent

2018 2018 Rank

31 Nigeria 408.61 0.467 2,108 143 Africa
32 Ireland 385.14 0.440 80,641 6 Europe
33 Israel 373.75 0.427 42,115 24 Asia
34 South Africa 370.89 0.424 6,459 91 Africa
35 Denmark 369.76 0.423 63,830 8 Europe
36 Malaysia 364.92 0.417 11,237 67 Asia
37 Hong Kong 364.78 0.417 48,829 19 Asia
SAR
38 Singapore 349.66 0.400 61,767 10 Asia
39 Philippines 332.45 0.380 3,095 131 Asia
40 Colombia 327.98 0.375 6,581 89 South America
FACT 1:
There are vast differences in living standards around the world.

FACT 2:
There is also great variation in growth rates across countries.
 2018 GDP AND PER CAPITA GDP, ASEAN
COUNTRY GDP RANK PER CAPITA GDP
RANK
INDONESIA 1 5
THAILAND 2 4
MALAYSIA 3 3
SINGAPORE 4 1
PHILIPPINES 5 6
VIETNAM 6 8
MYANMAR 7 10
CAMBODIA 8 9
LAO PEOPLES DEMOCRATIC 9 7
REPUBLIC
BRUNEI DARUSSALAM 10 2
Incomes and Growth Around the World

Since growth rates vary, the country rankings can change over
time:
– Poor countries are not necessarily doomed to poverty forever
– e.g., Singapore, incomes were low in 1960 and are quite
high now.
– Rich countries can’t take their status for granted: They may
be overtaken by poorer but
faster-growing countries.
 Incomes and Growth Around the World

Questions:
– Why are some countries richer than others?
– Why do some countries grow quickly while others seem
stuck in a poverty trap?
– What policies may help raise growth rates and long-run
living standards?
 Productivity
 8th of the Ten Principles :
A country’s standard of living depends on its ability to
produce goods and services.
 This ability depends on productivity, the average quantity of
goods and services produced per unit of labor input.
 Y = real GDP = quantity of output produced
L = quantity of labor
so productivity = Y/L (output per worker)
 Production and Growth

– Productivity refers to the amount of goods and services

produced for each hour of a worker’s time.
– A nation’s standard of living is determined by the
productivity of its workers.

IMPORTANCE OF PRODUCTIVITY
When a nation’s workers are very productive, real GDP is large and
incomes are high.

When productivity grows rapidly, so do living standards.

 Standard of living generally refers to the level of wealth, comfort,
material goods and necessities available to a certain
socioeconomic class, in a certain geographic area. An evaluation
of standard of living commonly includes the following factors:
income. quality and availability of employment.

A country’s standard of living depends on its ability to produce

goods and services.

Within a country there are large changes in the standard of living

over time.
Determinants of productivity and its growth rate

1.Physical capital per worker

2.Human capital per worker
3.Natural resources per worker
4.Technology
 Physical Capital Per Worker
– The stock of equipment and structures used to produce goods
and services is called [physical] capital, denoted K.
– K/L = capital per worker.
– The tools and equipment used by a worker determine the quality
and quantity of the goods and service
– Productivity is higher when the average worker has more capital
(machines, equipment, etc.).
– an increase in K/L causes an increase in Y/L.
 Human Capital Per Worker
 Human capital (H):
the knowledge and skills workers acquire through education,
training, and experience
 Includes workers abilities and specialzation
 H/L = the average worker’s human capital
 Productivity is higher when the average worker has more human
capital (education, skills, etc.).
 an increase in H/L causes an increase in Y/L.
 Natural Resources Per Worker
 Natural resources (N): the inputs into production that nature
provides, e.g., land, mineral deposits
 Classified into renewable and non-renewable resources
 Other things equal,
more N allows a country to produce more Y.
 In per-worker terms,
an increase in N/L causes an increase in Y/L.
 Some countries are rich because they have abundant natural
resources
(e.g., Saudi Arabia has lots of oil).
 But countries need not have much N to be rich
(e.g., Japan imports the N it needs).
A renewable resource is a natural resource which replenishes to
overcome resource depletion caused by usage and
consumption, either through natural reproduction or other
recurring processes in a finite amount of time in a human time
scale. 
Wikipedia
A non-renewable resource is a resource of economic value
that cannot be readily replaced by natural means at a quick
enough pace to keep up with consumption. An example is
carbon-based fossil fuel. The original organic material, with
the aid of heat and pressure, becomes a fuel such as oil or
gas. Wikipedia
 Technological Knowledge
 Technological knowledge: society’s understanding of the best
ways to produce goods and services
 Refers to mechanical innovations and scientific know-how to
produce goods and services efficiently
 Technological progress does not only mean
a faster computer, a higher-definition TV,
or a smaller cell phone.
 It means any advance in knowledge that boosts productivity
(allows society to get more output from its resources).
 Introduction of hybrid rice varieties that produces bumper harvest, takes
less farm space, and less fertilizer, pest and weather resistant
Technological Knowledge vs. Human Capital

 Technological knowledge refers to society’s

understanding of how to produce goods and services
 Human capital results from the efforts people expend
to acquire this knowledge.
 Both are important for productivity.
 The Production Function
• The production function is a graph or equation showing the relation
between output and inputs:
• Y = A F(L, K, H, N)
• F( ) – a function that shows how inputs are combined to produce
output
• “A” – the level of technology
• “A” multiplies the function F( ),
so improvements in technology (increases in “A”) allow more output (Y)
to be produced from any given combination of inputs.
 The Production Function
Y = A F(L, K, H, N)
• The production function has the property
constant returns to scale: Changing all inputs
by the same percentage causes output to change by that
percentage. For example,
• Doubling all inputs (multiplying each by 2)
causes output to double:
2Y = A F(2L, 2K, 2H, 2N)
 Increasing all inputs 10% (multiplying each by 1.1)
causes output to increase by 10%:
1.1Y = A F(1.1L, 1.1K, 1.1H, 1.1N)
 The Production Function
Y = A F(L, K, H, N)
 If we multiply each input by 1/L, then output is multiplied by 1/L:
 Y/L = A F(1, K/L, H/L, N/L)
 This equation shows that productivity (output per worker)
depends on:
– the level of technology (A)
– physical capital per worker
– human capital per worker
– natural resources per worker