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Summary of Chapter 22: Production and Growth
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Chapter 22: Production and GrowthEconomic Growth Around the World
Economic growth can be analyzed in relation to the population. We can identify two
concepts, GDP per capita and GDP per worker. GDP per capita takes the level of real GDP
at a point in time and divides it by the population to get a measure of income per head of
population:
Real GDP per capita=Real GDP /Total Population
Similarly, we can look at real GDP in relation to the number of people employed in the
population to give a measure of income per head of the working population.
Real GDP per worker=Real GDP /Number of people ∈employment
Growth Theory
Over a period of time, a trend can be established which is usually expressed as the growth
rate in percentage terms. Trend growth and actual growth are important factors when we
look at business cycles. In order for a country to experience considerable improvements in
living standards, sustained growth over a period of time is necessary. There are many
factors that may influence economic growth:
● The rate of human and physical capital and population growth
● The level of macroeconomic stability in an economy.
● The type of trade policy that exists in a country (is the country outward-looking or
does it tend to be insular?)
● The nature and quality of institutions and governance in the country concerned
● The extent to which violence, war, and conflict exist in a country.
● Regional characteristics such as whether the country is part of Europe, North
America, Asia or Sub-Saharan Africa.
● Geographical factors such as physical resource endowments and climate
● The extent to which a country is competitive in international markets
● Internal factors such as the amount of productive land available.
Productivity
Why Productivity is so Important
Productivity refers to the number of goods and services that a worker (or any factor of
production) can produce in a specific time period. The key role of productivity is determining
living standards. An economy’s GDP measures three things at once: total income earned by
everyone in the economy, total expenditure on the economy’s outputs of goods and
services, and the value of the output produced.
How Productivity is Determined
Physical Capital
Workers can be more productive if the capital is high. The stock of equipment and structures
that are used to produce goods and services is called physical capital, or just capital. An
important feature of capital is that it is a produced factor of production. Capital is an input
into the production process that in the past was an output from the production process.
Capital is a factor of production used to produce all kinds of goods and services, including
more capital.
, Human Capital
The second determinant of productivity is human capital. Human capital is a term for the
knowledge and skills that workers acquire through education, training, and experience.
Human capital includes the skills accumulated in early childhood programs, primary school,
secondary school, university, and on-the-job training for adults in the labor force. Like
physical capital, human capital raises a nation’s ability to produce goods and services, it is
also a produced factor of production. Producing human capital takes input in the form of
teachers, lecturers, libraries, and student time.
Natural Resources
The third determinant of production is natural resources. Natural resources are inputs into
production that are provided by nature, such as land, rivers, and mineral deposits. There are
two forms: renewable and non-renewable resources. Although natural resources can be
important, they are not necessary for an economy to be highly productive in producing goods
and services.
Technological Knowledge
The fourth determinant of productivity is technological knowledge. Which is, the best
understanding of how to produce goods and services. Technological changes take many
forms. Some technology is common knowledge, like Ford’s first use of the assembly lines,
then all other car manufacturers started to use this technique. Another technology is
proprietary, it is known only by the company that discovers it, only the Coca-Cola Company
knows the formula that makes the famous drinks. Still, another technology is proprietary for
a short time, when a pharmaceutical company discovers a new drug, the patent system
gives that company a temporary right to be its exclusive manufacturer. When the patent
expires, other companies are allowed to make the drug. All these forms of technical
knowledge are important for the economy’s production of goods and services. Technological
knowledge refers to society’s understanding of how the world works, and human capital
refers to the resources expended transmitting this understanding to the labor force.
Technical progress means that the quality of physical and human capital is improved so for
any given quantity of capital and labor, the average productivity of both is higher.
Determinants of Economic Growth
The assumption is that there are constant returns to scale, a closed economy (so Y=C+S)
and that increases in capital and labor are subject to diminishing marginal product. Recall
that the output level (GDP), denoted by letter Y, is determined by the level of technology (A),
and the quantities and productivity of labor and capital (K and L). Assuming technology is
given, increasing physical capital stock is associated with a rising GDP, relatively quickly at
first but then slows due to the law of diminishing marginal products. The level of investment
in capital stock is shown by line I.
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