Principles of Macroeconomics Chapter 12 Productivity and Economic Growth

Productivity – the amount of goods one worker can produce in one hour Explains the differences in living standards across the world Determines economic growth and economic well-being Public policies can help enhance productivity within a country

Productivity and Standard of Living Productivity determines the standard of living Countries that are richer have: Higher life expectancy Greater access to basic resources: water, food ect. Lower child and maternal mortality rates Universal education for both genders Standard of living can be measured via income per capita (or) GDP per capita

GDP per Capita

Life Expectancy Across the World

Access to Safe Drinking Water Percentage of population with access to safe drinking water

Infant Mortality Rates Number of deaths in children under 1 per 1000 live births

Adult Literacy Rates

Income and Growth Rates Growth rates vary between countries and across time Middle-income economies – Taiwan, Hong Kong, Singapore, Thailand – were very poor until 1980’s Poor countries have the greatest potential for growth Rich countries can grow too – but usually at a slower rate

Productivity and Growth When a nation’s workers are very productive, real GDP is large and incomes are high When productivity grows rapidly, so do living standards 4 Key Determinants of Productivity: Physical capital per worker Human capital per worker Natural resources per worker Technological Knowledge

Determinants of Productivity Physical Capital per worker (K/L) With more machines available in the country, each worker can produce more Farming in US vs. farming in Zambia Human Capital per worker (H/L) Skills, education, training and technical knowledge With a more educated work force, a country can produce a wider range of goods

Determinants of Productivity Natural Resources per worker (N/L) With more land, irrigable water, mineral deposits, a country can use its own resources in production But, some countries are rich and depend on importing their natural resources (ie: Japan) Technological Knowledge Access to latest technology Use of best practices in production Advancement in knowledge that boosts productivity

Application 1 Consider a small economy that produces only t-shirts. What is the physical capital per labor? What is the labor productivity of this country? What is the growth in production in this country? Year Physical Capital Labor Force Labor Hours Output 2000 100 machines 10 workers 5000 hrs 7500 t-shirts 2001 130 machines 11,000 t-shirts 2002 160 machines 15,000 t-shirts 2003 190 machines 18,500 t-shirts 2004 220 machines 21,000 t-shirts 2005 250 machines 22,000 t-shirts

The Production Function & Diminishing Returns K/L Y/L If workers have little K, giving them more increases their productivity a lot. Output per worker (productivity) If workers already have a lot of K, giving them more increases productivity fairly little. This slide replicates Figure 1 from the text, which illustrates the relationship between productivity (output per worker) and one of its determinants: capital per worker. The curve is drawn for given values of the other determinants of productivity (human capital per worker, natural resources per worker, technology). A change in any of these other determinants would shift the curve. The graph is positively sloped: productivity is higher when the average worker has more capital. The graph is curved, reflecting diminishing returns to capital: as the average worker gets more and more capital, productivity rises at a decreasing rate. Students may find it easier to understand the following statement (especially if this is their first course in economics): If workers don’t have very much capital, giving them more will increase their productivity a lot. If workers already have a lot of capital, giving them more won’t increase their productivity very much. Capital per worker 14

Group Discussion Economic Policies to Enhance Growth: All governments are concerned with sustaining and ensuring economic growth for their countries What are some policies that you think are important to keep the economy growing? What can the government do to promote economic growth?

Key Takeaways The most essential component in ensuring high living standards is productivity Differences in productivity explain the differences in living conditions across many countries There are four key factors that determine productivity in a country Governments can enhance productivity through promoting growth-enhancing policies