Economic Growth and Productivity Chapter 13

Study Questions 1. What is the standard of living and how is it measured? 2. How can the standard of living be raised? 3. What might lower the standard of living? 4. What is productivity and why is it important?

Study Questions 5. How does specialization lead to efficiency? 6. What is necessary for specialization? 7. What is innovation and how does it increase productivity?

Standard of Living Our material standard of living is an indication of our economic well-being.  Standard of Living = Total Output/Population

Standard of Living How to raise the standard of living:  Reduce the population?

Standard of Living How to raise the standard of living:  Reduce the population?  Increase the total output! Ideally, the increase in total output must be greater than the increase in population.

Increasing Total Output PPC pushes outward. GDP grows. To increase the productive capability:  increase the level of resources  increase the efficiency of using those resources  use better technology  increase economic freedom

Increase the Level of Resources Land – use new extraction technology; shift use to more pressing needs Labor – increase numbers; increase quality Capital – keep interest rates low; maintain a favorable climate for investment Entrepreneurship – easy to start a business; favorable tax/regulatory climate

Increase the Level of Technology Encourage technological development Entrepreneurial response to changing market conditions No government protection of mature industries

Can the Standard of Living Be Lowered? Yes, if:  resources are decreased  economic freedom is restricted  fail to keep up with modern technology  stifling bureaucracy inhibits growth  widespread corruption exists  property rights are poorly defined

Productivity Productivity = Output/Input We use labor hours as a proxy for input, so: Productivity = Output/Labor Hours

Improving Productivity Reducing waste Improved efficiency through specialization Innovation

Reducing Waste Inefficient processes produce both desired goods and waste products. Improve process efficiency:  fewer waste products are produced  more desired products are produced

Specialization Division of labor:  Each worker specializes in one task improve skills gets better with practice invent new or better tools and processes  Result: more output per labor hour  Productivity increases

Comparative Advantage You can complete a task at a lower opportunity cost than others. You should specialize in that task. They should become your customers.

Key to Increasing Standard of Living Specialize according to comparative advantage:  more output from fewer inputs Produce a surplus amount and exchange with others for goods they have a comparative advantage in. Result: Greater output from fewer inputs.

Innovation Reorganize the Production Process Switch Resource Inputs Mass Production Mechanization Mass Markets

Reorganize the Production Process Batch mode to Assembly Line mode  requires specialization  multiple units in production at one time

Switch Resource Inputs If one input’s costs rise, savings can be found by switching to an alternative input whose costs are lower.  switching energy sources  switching from human effort to robotics  control by programmed computers

Mass Production Large scale production of (nearly) identical units of output.  spreads fixed costs over a large output  enables purchase of inputs at bulk rates  enables more specialization of workers and equipment  all of these lower the average cost per unit  enables sale at a lower price

Mechanization For repetitive tasks, replace humans with specialized equipment  result: more uniformity in results  faster production runs  better quality of output  lower production costs per unit

Mechanization Low skill repetitive jobs are eliminated. Higher skill jobs are created:  engineering design  manufacturing of equipment  operation of equipment  maintenance of equipment

Mass Markets Catering to a larger market allows larger production runs.  Lower costs  Greater productivity  More goods required to be produced  More high skilled jobs created to operate and maintain equipment

Results Efficiency gains Productivity gains Increase in economic growth Increase in wages Increase in standard of living

Causes of Economic Growth - I Increased resources available Expanded capital goods base Increased/improved technology Increased productivity Protection of individual property rights Economic freedom

Causes of Economic Growth - II Improved infrastructure Peace and stability Low or no political corruption A favorable tax climate A favorable regulatory climate

Results of Economic Growth More satisfactions of wants and needs by more people Raised standard of living Reduced poverty rates Improved working conditions More leisure time Greater concern for the environment Greater ability to deal with poverty and environmental problems

Technology helps growth php?iid=258&type=educator