Productivity & Economic Growth

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u A countrys standard of living depends on its ability to produce goods and services. u Within a country there are large changes in the standard of living.
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Presentation transcript:

Productivity & Economic Growth Why Productivity Matters!

GDP & Standard of Living Standard of living depends on a country’s ability to produce goods & services Real GDP per person has ↑ 2 % per year in USA over last 100 years! To ↑ Standard of Living PPF curve must shift right! Productivity per worker must rise!

Productivity Productivity the amount of output (goods & services) produced from a unit of input (labor, physical capital, etc) ↑ productivity => ↑ standard of living (rising wealth) Productivity (efficiency) ↑ More goods produced with same resources Standard of Living

Law of Diminishing Returns of Capital As supply of physical capital rises, the extra output produced from an additional unit of physical capital falls. Output per worker An economy has a high level of physical capital, an extra unit leads to a small increase in output 1 Bottom Line: It is very hard for USA to increase Productivity An economy with a low level of physical capital, an extra unit leads to a large increase in output. 1 Physical Capital per worker

Determinants of Productivity Factors of production determine productivity: Labor Physical capital Human capital Natural resources Technological knowledge Are Robotics are future? USA has led the world in technology/ Internet Led to strong GDP growth in 1980’s & 90’s

Encourage = PROVIDE INCENTIVES to: GDP & Gov’t Policy Gov’t policies to raise productivity: Encourage saving & investment Encourage investment from abroad. Encourage education/training Establish property rights & political stability Promote free trade Promote research and development Encourage = PROVIDE INCENTIVES to: start new business improve human capital raise productivity

Real Growth Per Worker GDP Per Worker % (per capita) Growth Rate - -

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