1. 12
Production and Growth

2. Economic Growth Around the World
Growth rate of real GDP over time
Measures how rapidly real GDP per person grows over time
Is the economy developing and how fast?
Typically use average GDP growth rate over intervals of 5 or more years
smooth out short-run fluctuations
shows trend, or long-term, rate of growth

3. United States GDP Growth Rate
The Gross Domestic Product (GDP) in the United States
expanded 2.50 percent in the first quarter of 2013 over the previous quarter. (Bureau of Economic Analysis)
Historically, from 1947 until 2013, US GDP Growth Rate averaged 3.23
all time high of March of 1950
record low of Percent in March of 1958.
Finance, insurance, real estate, rental, leasing, health care, social assistance, professional, business and educational services account for more than 40 percent of GDP.
Retail and wholesale trade creates another 12 percent of the wealth.
Government related services fuel 13 percent of GDP.
Utilities, transportation and warehousing and information 10 percent of the GDP.
Manufacturing, mining, and construction 17 percent of the output.
Agriculture 1.5 percent of the GDP, yet due to use of advance technologies, the United States is a net exporter of food.

4. Productivity: its Role and Determinants
Quantity of goods and services produced from each unit of labor input (output per unit labor – hours?)
Output per person (per hour)
Increases in productivity due to:
Improved technology
“Working smarter” – better educated
Why productivity is so important
Key determinant of living standards

5. Productivity of Labor – output and labor
Production Function: Output = F(inputs)
Productivity of Labor – output and labor
Output increases as labor increases
But increases at a decreasing rate
Average Output increases initially – scale effects
Marginal Product of Labor measures how much
each additional individual increases firm’s output
Value theory of labor: wage = marg prod of labor

6. Productivity: its Role and Determinants
How productivity is determined
Physical capital
Stock of equipment and structures
Used to produce goods and services
Human capital
Knowledge and skills that workers acquire through education, training, and experience

7. Effect of an Increase in Capital (K) on Productivity of Labor
Increase in education/training of workers -> similar effect

8. Productivity: its Role and Determinants
How productivity is determined
Natural resources
Inputs into the production of goods and services
Provided by nature, such as land, rivers, and mineral deposits
Technological knowledge
Society’s understanding of the best ways to produce goods and services

9. Economic Growth and Public Policy
Diminishing returns and the catch-up effect
Diminishing returns
Marginal returns on investment:
Benefit (increase in output) from an extra unit of an input of K
Marg return declines as the quantity of the input increases
More mature economies
Smaller increases in productivity with Investment than “newer” industrializing economies

10. Illustrating the production function1
Illustrating the production function
Output
per Worker 1
2. When the economy has a
high level of capital, an
extra unit of capital leads to
a small increase in output. 1
1. When the economy has a low level of capital, an
extra unit of capital leads to a large increase in output.
Output per Worker
This figure shows how the amount of capital per worker influences the amount of output per worker. Other determinants of output, including human capital, natural resources, and technology, are held constant. The curve becomes flatter as the amount of capital increases because of diminishing returns to capital

11. Economic Growth and Public Policy
Diminishing returns and the catch-up effect
Catch-up effect
Countries that start off poor
Tend to grow more rapidly than countries that start off rich
Poor countries
Low productivity
Even small amounts of capital investment
Increase workers’ productivity substantially

12. Economic Growth and Public Policy
Diminishing returns and the catch-up effect
Rich countries
High productivity
Additional capital investment
Small effect on productivity
Poor countries
Tend to grow faster than rich countries

13. GNP Growth is Not Steady

14. Real GDP in the United States2
Real GDP in the United States
This figure shows quarterly data on real GDP for the U.S. economy since Recessions—periods of falling real GDP—are marked with the shaded vertical bars.

15. Real GDP (year to year) and Trend Rate of Growth

16. Productivity vs. Compensation Economic Policy Institute
                                                                        

19. Measuring Income Inequality/Equality
GINI Coefficient
The most equal society will be one in which every person receives the same income (G = 0); the most unequal society will be one in which a single person receives 100% of the total income and the remaining people receive none (G = 1−1/N).

20. Most Unequal
“Great Gatsby” era
More equal distribution

21. Income Inequality in Developed Countries Using the Gini Coefficient (> G -> Grtr Inequality)

22. Economic Growth and Public Policy
Saving and investment (in new technology)
Raise future productivity
Invest more current resources in the production of capital
Trade-off
Devote fewer resources to produce goods and services for current consumption
Policy options
Tax cuts for the rich as they save more (> .2)
Savings incentives for all

23. Economic Growth and Public Policy
Diminishing returns and the catch-up effect
Higher savings rate
More funds available for Investment
Investment - > increase in Capital stock
Rising productivity (technological shift)
More rapid growth in GDP
Increases current labor force’s productivity

24. The real middle-class challenge - Samuelson
CEA found:
that inequality isn’t the main cause of sluggish middle-class incomes. It’s poor productivity.
Rhetorical solutions:
more infrastructure spending;
better schools;
simpler taxes;
more research.
Though some policies may be desirable, there’s no guarantee they will improve productivity. Influencing productivity is hard because it depends on so much (management and workers, technology, market behavior, government policies and more).

25. Economic Growth and Public Policy
Diminishing returns and the catch-up effect
Diminishing returns
Marginal returns on investment:
Benefit (increase in output) from an extra unit of an input of K
Marg return declines as the quantity of the input increases
More mature economies
Smaller increases in productivity with Investment than “newer” industrializing economies

26. Economic Growth and Public Policy
Education
Investment in human capital
Gap between wages of educated and uneducated workers
Opportunity cost: wages forgone
Conveys positive externality
Problem for poor countries
Brain drain

27. Economic Growth and Public Policy
Health and nutrition
Healthier workers – more productive
The right investments in the health of the population
One way for a nation to increase productivity and raise living standards
Historical trends: long-run economic growth
Improved health - from better nutrition
Taller workers – higher wages – better productivity

28. Economic Growth and Public Policy
Health and nutrition
Vicious circle in poor countries
Are poor
Because populations are not healthy
Populations are not healthy
Because they are poor
Cannot afford better healthcare and nutrition

29. Economic Growth and Public Policy
Property rights and political stability
Foster economic growth
Protect property rights
Ability of people to exercise authority over the resources they own
Courts – enforce property rights
Promote political stability

30. Economic Growth and Public Policy
Research and development
Knowledge – public good
Farming methods
Aerospace research
Air Force; NASA
Research grants
National Science Foundation
National Institutes of Health
Tax breaks
Patent system

31. Economic Growth and Public Policy
Population growth
Large population
Large labor force
More consumers
Stretching natural resources?
Diluting the capital stock
High population growth
Reduces GDP per worker
Promoting technological progress