N. G R E G O R Y M A N K I W Premium PowerPoint ® Slides by Ron Cronovich 2008 update © 2008 South-Western, a part of Cengage Learning, all rights reserved 12 P R I N C I P L E S O F F O U R T H E D I T I O N Production and Growth

1 CHAPTER 12 PRODUCTION AND GROWTH Let’s get started  How would life be different if you were living in: England? Mexico? Mali?

A typical family with all their possessions in the U.K., an advanced economy GDP per capita: $35,580 Life expectancy: 78 years Adult literacy: 99% GDP per capita: $35,580 Life expectancy: 78 years Adult literacy: 99%

A typical family with all their possessions in Mexico, a middle income country GDP per capita: $11,410 Life expectancy: 74 years Adult literacy: 92% GDP per capita: $11,410 Life expectancy: 74 years Adult literacy: 92%

A typical family with all their possessions in Mali, a poor country GDP per capita: $1,130 Life expectancy: 41 years Adult literacy: 46% GDP per capita: $1,130 Life expectancy: 41 years Adult literacy: 46%

GDP per capita, 2005 Growth rate, China$6,5725.8% Singapore29,9215.4% Japan30,8213.8% Spain26,1253.2% India3,4862.7% Israel25,6702.7% United States41,8542.2% Canada32,8862.1% Colombia7,7691.8% New Zealand22,5111.4% Philippines4,9201.4% Argentina14,4211.0% Saudi Arabia14,7290.8% Rwanda1,3330.3% Haiti1,836–1.2% Incomes and Growth Around the World FACT 1: There are vast differences in living standards around the world.

GDP per capita, 2005 Growth rate, China$6,5725.8% Singapore29,9215.4% Japan30,8213.8% Spain26,1253.2% India3,4862.7% Israel25,6702.7% United States41,8542.2% Canada32,8862.1% Colombia7,7691.8% New Zealand22,5111.4% Philippines4,9201.4% Argentina14,4211.0% Saudi Arabia14,7290.8% Rwanda1,3330.3% Haiti1,836–1.2% Incomes and Growth Around the World FACT 2: There is also great variation in growth rates across countries.

7 Your turn!  Examine the table on page 243 Which countries have gotten richer over time? Which countries have had high growth? What correlation do you see? CHAPTER 12 PRODUCTION AND GROWTH

8 Incomes and Growth Around the World Since growth rates vary, the country rankings can change over time: Poor countries are not necessarily doomed to poverty forever – e.g., Singapore, incomes were low in 1960 and are quite high now. Rich countries can’t take their status for granted: They may be overtaken by poorer but faster-growing countries.

9 CHAPTER 12 PRODUCTION AND GROWTH Incomes and Growth Around the World Questions:  Why are some countries richer than others?  Why do some countries grow quickly while others seem stuck in a poverty trap?  What policies may help raise growth rates and long-run living standards?

10 Your turn!  What are the 2 primary factors that determine standard of living?  Which one do you think is more important for the long-run prosperity of the country? Why? CHAPTER 12 PRODUCTION AND GROWTH

11 CHAPTER 12 PRODUCTION AND GROWTH Productivity  Recall one of the Ten Principles from Chapter 1: A country’s standard of living depends on its ability to produce g & s.  This ability depends on productivity: the average quantity of g&s produced per unit of labor input.  Y = real GDP = quantity of output produced L = quantity of labor so productivity = Y/L (output per worker)

12 CHAPTER 12 PRODUCTION AND GROWTH Why Productivity Is So Important  When a nation’s workers are very productive, real GDP is large and incomes are high.  When productivity grows rapidly, so do living standards.  What, then, determines productivity and its growth rate?

13 Physical Capital Per Worker  Recall: The stock of equipment and structures used to produce g&s is called [physical] capital, denoted K.  K/L = capital per worker.  Productivity is higher when the average worker has more capital (machines, equipment, etc.). i.e., an increase in K/L causes an increase in Y/L. I can catch a lot more fish if I have a fishing rod or a net!

14 Human Capital Per Worker  Human capital (H): the knowledge and skills workers acquire through education, training, and experience  H/L = the average worker’s human capital  Productivity is higher when the average worker has more human capital (education, skills, etc.). i.e., an increase in H/L causes an increase in Y/L. I can catch a lot more fish if I have been trained in fishing techniques!

15 Natural Resources Per Worker  Natural resources (N): the inputs into production that nature provides, e.g., land, mineral deposits  Other things equal, more N allows a country to produce more Y. In per-worker terms, an increase in N/L causes an increase in Y/L. Examples - Saudi Arabia - Japan I can catch a lot more fish if there are more fish swimming in the water!

16 Technological Knowledge  Technological knowledge: society’s understanding of the best ways to produce g&s  Technological progress does not only mean a faster computer, a higher-definition TV, or a smaller cell phone.  It means any advance in knowledge that boosts productivity (allows society to get more output from its resources). e.g., Henry Ford and the assembly line. I can catch a lot more fish if I invent a new fishing lure!

17 Tech. Knowledge vs. Human Capital  Technological knowledge refers to society’s understanding of how to produce g&s.  Human capital results from the effort people expend to acquire this knowledge.  Both are important for productivity. Technological Knowledge is the quality of the textbooks Human Capital is the amount of time the people have devoted to reading them

18 Your Turn!  What 4 things determine a country’s productivity?  What is the difference between Human Capital and Technological Knowledge?  Give an example of a country and describe each of their determinants of productivity CHAPTER 12 PRODUCTION AND GROWTH

A C T I V E L E A R N I N G 1 : Discussion question Which of the following policies do you think would be most effective at boosting growth and living standards in a poor country over the long run? 19 a.offer tax incentives for investment by local firms b.…by foreign firms c.give cash payments for good school attendance d.crack down on govt corruption e.restrict imports to protect domestic industries f.allow free trade