1. Productivity & Economic Growth Why Productivity Matters!

2. GDP & Standard of Living Standard of living depends on a country’s ability to produce goods & services –Real GDP per person has ↑ 2 % per year in USA over last 100 years! To ↑ Standard of Living PPF curve must shift right! Productivity per worker must rise!

3. Real Growth Per Worker -- GDP Per Worker % (per capita) Growth Rate

4. Productivity = Efficiency Productivity refers to the amount of output (goods & services) produced from each unit of input (labor, physical capital, etc) –largely determines standard of living –rising productivity leads to rising wealth Standard of Living Productivity ( efficiency ) ↑ More goods produced with same resources

5. Determinants of Productivity Factors of production determine productivity: Physical capital Human capital Natural resources Technological knowledge USA has led the world in technology/ Internet Led to strong GDP growth in 1980’s & 90’s Are Robotics are future?

6. Critical Factors for real GDP Growth Property rights –are a prerequisite for a market system to work Savings & Investment –Gov’t incentives to save & promote business investment (I) Research & Development: –Most technological advance comes from private research by firms/individual inventors Educated workforce: – necessary for today’s high technology economy

7. Diminishing Returns of Capital Output per worker 1 1 Capital per worker 1. When the economy has a low level of capital, an extra unit of capital leads to a large increase in output. 2. When the economy has a high level of capital, an extra unit of capital leads to a small increase in output. As the stock of physical capital rises, the extra output produced from an additional unit of capital falls. Hard for USA to increase Productivity

8. GDP & Gov’t Policy Gov’t policies to raise productivity: –Encourage saving & investment –Encourage investment from abroad. –Encourage education/training –Establish property rights & political stability –Promote free trade –Promote research and development Encourage = PROVIDE INCENTIVES to: start new business improve human capital raise productivity

9. http://www.pbs.org/newshour/bb/business/july-dec13/jobs_09-06.html What type of Jobs are being created & Shrinking Labor Force