EDEV 311: ECONOMIC

DEVELOPMENT
SESSION 3: PRODUCTION AND GROWTH
HOW ECONOMIC GROWTH DIFFERS AROUND
THE WORLD
PRODUCTION & GROWTH AROUND THE WORLD

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

and services.

 Within every country there are enormous changes in the standard of

living over time considering numerous economical factors.

 Living standards, as measure by per capita Real GDP, vary

significantly among nations.

 The most developed countries have Real per capita GDP that is at
least 10 to 20 times more compared to that of the poorest countries.
PRODUCTION & GROWTH AROUND THE WORLD

THE PROCESS OF CREATING A HIGH

LIVING STANDARD IS KEYED TO
PRODUCTIVITY
ECONOMIC GROWTH AROUND THE WORLD
 THE RULE OF 70
ANNUAL GROWTH RATES THAT SEEM SMALL BECOME LARGE WHEN COMPOUNDED FOR
MANY YEARS.

*COMPOUNDING REFERS TO THE ACCUMULATION OF A RATE OVER A

CERTAIN PERIOD OF TIME.

THE RULE OF 70 PROVIDES THAT THE VALUE OF A VARIABLE WILL DOUBLE IN

APPROXIMATELY (70/ANNUAL GROWTH RATE) YEARS.
 THE RULE OF 70
EXAMPLE:

The amount of Php:5,000.00 invested at seven percent (7%) interest per

year, will double in size in 10 calendar years.

SOLUTION:

70 / 7 = 10
 PRODUCTIVITY: ITS ROLE & DETERMINANTS

To understand the large variance in the living standards of countries we must

understand and focus on the PRODUCTION of goods and services.

 PRODUCTIVITY refers to the quantity of goods and services that a worker can
produce for each hour of work
 The inputs used to produce goods and services are called the FACTORS OF
PRODUCTION
 HOW PRODUCTIVITY IS DETERMINED
THE FACTORS OF PRODUCTIONS ARE:
1. PHYSICAL CAPITAL
2. HUMAN CAPITAL
3. NATURAL RESOURCES
4. TECHNOLOGICAL KNOWLEDGE

• CAPITAL would mean the produced

factor of production, i.e. capital is an
input into the production process that
in the past was an output from
production.
FACTORS OF PRODUCTION – PHYSICAL CAPITAL

 The stock of equipment and structures that are used to produce

goods and service.

EXAMPLES:
 Tools used to build or repair automobiles
 Tools used to build homes or buildings
 Buildings (e.g. office, schools, condominiums)
FACTORS OF PRODUCTION – HUMAN CAPITAL

 The economist’s term for the KNOWLEDGE & SKILLS that

workers acquire through education, training and experience.
 Like physical capital, human capital raises a country’s ability to
produce goods and services
FACTORS OF PRODUCTION – NATURAL RESOURCES

 Inputs used in production that are provided by nature, such as

land, rivers and mineral deposits.
FACTORS OF PRODUCTION – TECHNOLOGICAL KNOWLEDGE

 The understanding of the best ways to produce goods and

services.
 TECHNOLOGICAL KNOWLEDGE refers to the society’s
understanding about how the world works while HUMAN
CAPITAL refers to the resources expended in transmitting this
understanding to the labor force.
FACTORS OF PRODUCTION
ECONOMIC GROWTH & PUBLIC POLICY
 ECONOMIC GROWTH & PUBLIC POLICY

 Public or government policies, laws, traditions and institutions are

critical to transforming resources into useful output.
 Governments can do so many things to encourage or impede the
attainment of high living standards.
 ECONOMIC GROWTH & PUBLIC POLICY
Government policies may include:
 Encourage savings and investments
 Encourage education and training
 Establish secure property rights and political stability
 Promote free trade policies
 Control of population growth (Different from preventing)
 Promote research and development
GOVERNMENT POLICY:
ENCOURAGE SAVINGS & INVESTMENTS
 One way to raise future productivity is to invest more
current resources in the production of capital. Thus,
governments can encourage capital accumulation through:
 from domestic sources by imposing low taxes on
interest and dividend incomes
From foreign sources by making such capital secure
and welcome domestically
GOVERNMENT POLICY:
ENCOURAGE EDUCATION & TRAINING
 Education is as important as investment in physical
capital.
 Most likely, governments make it necessary for their
countries to provide free basic and tertiary education and
trainings (e.g. TESDA) so that the workforce can acquire
the specialized skills leading to higher productivity.
GOVERNMENT POLICY:
ESTABLISH SECURE PROPERTY RIGHTS & POLITICAL STABLITY

 Property rights refer to the ability of the people to

exercise authority over the resources they own.
 An economy-wide respect for property rights is an
important pre-requisite for the price system to work.
 It is necessary for investors to feel that their investments
are secure and safe from political instability (unstable).
GOVERNMENT POLICY:
PROMOTE FREE TRADE
 To exploit comparative advantage and maximize
production and efficiency, it is important for countries to
have the opportunity to sell its products abroad and be
able to purchase from lower-opportunity cost producers.
 A reciprocal agreement, also called reciprocity, is an agreement
between two states that allows residents of one state to request
exemption from tax withholding in the other (reciprocal) state.
This can save you the trouble of having to file multiple state
returns.
GOVERNMENT POLICY:
CONTROL POPULATION
 Population is a key determinant of a country’s labor force.
Large populations tend to produce greater total GDP. The
caveat however is that higher GDP does not mean higher
well-being for the person, thus, a GDP per person is a
more accurate measurement considering that a high
population growth reduces the GDP per person.
GOVERNMENT POLICY:
RESEARCH & DEVELOPMENT
 The advancement of technological knowledge has led to
higher standards of living. Technological advancement
comes from private firms and public agencies (e.g. Public-
Private Partnerships)
 Government’s role is to encourage the research and
development of new technologies through research grants,
tax breaks, and the patent system.
All needed criteria to be met before development cost be
capitalized under IAS 38:
 It must be technically feasible to complete development of
the intangible asset to make it available for use or sale
  The company must demonstrate an intention to complete
development of the asset and use or sell it
 The company must have the ability to use or sell the asset
 The company must show how the asset will generate future
economic benefits, demonstrating existence of a market for
the output of the asset or the asset itself or the usefulness
of the asset, if it is to be for company use
All needed criteria to be met before development cost be
capitalized under IAS 38:
 The company must have sufficient financial, technical
and other resources available for the completion of the
asset for use or sale
 The company must demonstrate an ability to accurately
measure expenditures that are attributable to the
development of the asset.

* Then amortize over it’s useful life depending upon

nature or where the R&D is pertaining to
THANK YOU !
-OLFU 1ST SEMESTER A.Y. 2020-21