1. Chapter 12
Production and Growth

2. Outline International comparisons of real GDP per capita
What is productivity, its determinants, and its impact on economic growth
Link between productivity, economic growth and a nation’s public policy

3. Real GDP per capita and living standards
Country
Period
Real GDP per person at beginning of period (1997 Can $)
Real GDP per person at end of period (1997 Can $)
Growth rate Per year (%)
Japan
1656
32392
2.82
Canada
2616
30261
1.95
China
789
4942
1.91
USA
4413
39784
1.75
India
743
2699
1.34

4. Living standards

5. Productivity
Productivity is the amount of goods and services produced from each hour of a worker’s time
Productivity determines the living standards of a nation as the latter depends on the nation’s ability to produce goods and services
Determinants of Productivity:
Physical capital
Human capital
Natural resources
Technological knowledge
Y=A F(L, K, H, N)

6. Economic Growth and Public Policy
Can public policy raise productivity and living standards?
Encourage Savings and Investment
Recall that capital is a produced factor of production
Tradeoff between capital investment and consumption goods
Correlation between growth and investment (reverse causality?)
Diminishing returns to capital

7. Diminishing returns and the catch-up effect
Diminishing returns is the property whereby the extra benefit from an extra unit of an input declines as the quantity of input increases
In the production process, capital is subject to diminishing returns
As a result of diminishing returns to capital:
In the LR, higher savings leads to greater accumulation of capital and therefore higher level of productivity and income BUT not to higher growth in productivity and income
Catch-up effect is the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

8. Economic Growth and Public Policy (contd)
Investment from abroad
FDI
Foreign portfolio investment
Foreign investment raises GNP (income) less than it raises GDP (production)
Source of state-of -the-art technologies
Education- investment in human capital
Positive externalities
Opportunity cost of schooling is higher in poor countries
Brain-drain- negative externality

9. Economic Growth and Public Policy (contd)
Property rights and political stability
Coordination of economic activities through market prices
Corruption impedes coordinating power of markets
Discourages domestic savings and foreign investment
Free trade
Infant- industry argument
Small size of the economy
Landlocked countries

10. Economic Growth and Public Policy (contd)
Control of population growth
Population growth reduces GDP per capita
Huge burden on education system
Malthus theory on population growth
Raising opportunity cost of additional children
Research and Development
Knowledge is a public good
Tax breaks and patent system encourages R and D

11. Economic Growth and Public Policy (contd)
Cross-country growth studies show that per capita growth is related to :
Initial income level of the country
Geographic and resource structure of the country
Market orientation of the economy
National saving rate
Is productivity slowdown in industrialized countries a result of slow technological progress?