Harcourt Brace & Company Chapter 24 Production and Growth

Harcourt Brace & Company Production and Growth A country’s standard of living depends on its ability to produce goods and services. Within every country there are large changes in the standard of living over time.

Harcourt Brace & Company Economic Growth Around the World (SEE Table 24-1) Living standards, as measured by per capita real GDP, vary significantly among nations. The most developed countries have real per capita GDP that is ten to twenty times that of the poorest countries.

Harcourt Brace & Company The Rule of 70 (or 72) Annual growth rates that seem small become large when compounded for many years. Rule of 70: The value of a variable will double in approximately (70 ÷ annual growth rate) years.

Harcourt Brace & Company The Rule of 70: Example $5,000 invested at 7 percent interest per year, will double to $10,000 in 10 years. 70 ÷ 7 = 10

Harcourt Brace & Company The Rule of 70: Example Suppose $5,000 is invested at 3 percent. Your investment will now take about 23 years to double.

Harcourt Brace & Company Productivity: Its Role and Determinants A key to economic growth is “Productivity.” Productivity refers to the quantity of goods and services that a worker can produce for each hour of work.

Harcourt Brace & Company How Productivity is Determined  The Factors of Production include: – Physical Capital – Human Capital – Natural Resources – Technological Knowledge

Harcourt Brace & Company The Factors of Production: Physical Capital The stock of equipment and structures that are used to produce goods and services. Examples: – Tools used to build or repair automobiles – Computers to assist in data processing – Buildings, factories, etc.

Harcourt Brace & Company The Factors of Production: Human Capital The economist’s term for the knowledge and skills that workers acquire through education, training, and experience. Like physical capital, human capital raises a nation’s ability to produce goods and services.

Harcourt Brace & Company Inputs used in production that are provided by nature, such as land, rivers, and mineral deposits. Renewable Resources: trees, water Non-Renewable Resources: oil, coal The Factors of Production: Natural Resources

Harcourt Brace & Company The Factors of Production: Technological Knowledge The understanding of the best ways to produce goods and services. Technological Knowledge relates to research/development, new products/inventions, technical improvements, etc.

Harcourt Brace & Company Economic Growth and Public Policy Public policies, laws, traditions, and institutions are critical to transforming resources into useful output. Governments can do many things to encourage or impede the attainment of high living standards.

Harcourt Brace & Company Economic Growth and Public Policy  Government policies: – Encourage saving and investment – Encourage education and training – Establish secure property rights and political stability – Promote free trade policies – Impact population growth – Promote research and development

Harcourt Brace & Company Government policies: Encourage saving and investment One way to raise future productivity is to invest more current resources in the production of capital (Figure 24-1). Governments can encourage capital accumulation: – from domestic sources by providing tax incentives. – from foreign sources by making such capital secure and welcome domestically.

Harcourt Brace & Company Government policies: Encourage education and training Education is at least as important as investment in physical capital. Basic education is funded by government so that the work force can acquire skills.

Harcourt Brace & Company Government policies: Establish secure property rights and political stability Property rights refer to the ability of people to exercise authority over the resources they own. A defense of property rights is necessary for investment and economic growth. Stable Monetary and Fiscal Policy promote economic growth.

Harcourt Brace & Company Government policies: Promote Free Trade To exploit comparative advantage and maximize production and efficiency, it is important for countries to have the opportunity to sell abroad and to be able to purchase from lower cost producers. Inward-Oriented vs. Outward-Oriented trade policies

Harcourt Brace & Company Government policies: Control of Population Growth Problems of excessive population growth Problems of slow population growth What can governments do about population growth? GDP per person

Harcourt Brace & Company Government policies: Research and Development The advancement of technological knowledge has led to higher standards of living. Technological advancement comes from private firms and public agencies. Government’s role is to encourage the research and development of new technologies through research grants, tax breaks, and the patent system.

Harcourt Brace & Company Conclusion Living standards, as measured by real GDP per capita, vary substantially from country to country. Productivity is a key determinant of economic growth Government policies and actions can facilitate or impede economic growth.