Modules 37 amp 39 A typical family with all their possessions in the UK an advanced economy Real GDP per capita 36600 Life expectancy 80 years Adult literacy 99 A typical family with all their possessions in Mexico a middle income country ID: 1028169
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1. Economic Growth and ProductivityModules 37 & 39
2. A typical family with all their possessions in the U.K., an advanced economyReal GDP per capita: $36,600Life expectancy: 80 yearsAdult literacy: 99%
3. A typical family with all their possessions in Mexico, a middle income countryReal GDP per capita: $14,800Life expectancy: 76 yearsAdult literacy: 93%
4. A typical family with all their possessions in Mali, a poor countryReal GDP per capita: $1,100Life expectancy: 51 yearsAdult literacy: 47%
5. GDP per capita, 2012Growth rate, 2006-10China$8,50010.6%Singapore60,5002.9%Japan35,2000.5%Spain31,000-0.3%Israel31,4002.2%India3,7007.1%United States49,0000.1%Canada41,1000.1%Colombia10,4003.1%New Zealand28,0000.4%Philippines4,1003.2%Argentina17,7005.9%Saudi Arabia24,5000%Rwanda1,4004.4%Haiti1,300–0.5%Incomes and Growth Around the WorldFACT 1:There are vast differences in living standards around the world.
6. GDP per capita, 2012Growth rate, 2006-10China$8,50010.6%Singapore60,5002.9%Japan35,2000.5%Spain31,000-0.3%Israel31,4002.2%India3,7007.1%United States49,0000.1%Canada41,1000.1%Colombia10,4003.1%New Zealand28,0000.4%Philippines4,1003.2%Argentina17,7005.9%Saudi Arabia24,5000%Rwanda1,4004.4%Haiti1,300–0.5%Incomes and Growth Around the WorldFACT 2:There are vast differences in growth rates.
7. Real GDP per capitaReal GDP per capita – real GDP divided by the population size. Focus on RGDP per capita to isolate the effects of changes in the population. United States RGDP - $15 trillion China RGDP - $7.3 trillionPer capita RGDP – US: $50,000 and China: $8,500Today more than 50% of the world’s people live in countries with a lower standard of living than the U.S. had a century ago.
8. How Do We Estimate Economic Growth? The Rule of 70A rule stating that the number of years required for per capital RGDP to double is equal to 70 divided by the average rate of economic growthExample: At an annual growth rate of 10%, per capita real GDP should double in about:
9. ProductivityA country’s standard of living depends on its ability to produce goods & services. Sustained economic growth in real GDP per capita occurs only when the amount of output produced by the average worker increases steadily.This ability depends on productivity: the average quantity of goods & services produced per unit of labor input.Example: Robinson Crusoe Because he is stranded alone, he must catch his own fish, grow his own vegetables, and make his own clothes.His standard of living depends on his ability to produce goods and services.
10. Determinants of ProductivityPhysical Capital Human CapitalTechnological Knowledge
11. Physical CapitalPhysical capital – the stock of equipment and structures that are used to produce goods and services. Productivity is higher when the average worker has more capital (machines, equipment, etc.).Example: Crusoe will catch more fish if he has more fishing poles.
12. Human CapitalHuman capital – the knowledge and skills that workers acquire through education, training, and experience.Productivity is higher when the average worker has more human capital (education, skills, etc.).Example: Crusoe will catch more fish if he has been trained in the best fishing techniques.
13. Technological KnowledgeTechnological knowledge: society’s understanding of the best ways to produce goods & servicesTechnological 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.
14. Technological Knowledge vs. Human CapitalTechnological knowledge refers to society’s understanding of how to produce goods & services. Human capital results from the effort people expend to acquire this knowledge. Both are important for productivity.
15. Physical Capital: Saving and InvestmentWe can boost productivity by increasing capital, which requires investment spending. Since resources are scarce, producing more capital requires producing fewer consumer goods. Reducing consumption = increasing saving. This extra saving funds the production of investment goods. Hence, a tradeoff between current and future consumption. How can government help?Giving businesses tax breaks on capital investmentGiving savers tax breaks on interest income
16. Investment from AbroadSaving by domestic residents is not the only way for a country to invest in new capital. To raise the amount of capital per worker, the government can also encourageForeign direct investment: a capital investment (e.g., factory) that is owned & operated by a foreign entity.Foreign portfolio investment: a capital investment financed with foreign money but operated by domestic residents (stock or bond purchases)
17. Government and Investment in Physical CapitalGovernment provides physical capital by building infrastructure – roads, power lines, ports, information networksGovernment can insure the soundness of the banking system through regulation. Without faith in banks there is no saving or investment.
18. ECONOMIC GROWTH AND PUBLIC POLICYHow canpublic policy affect long-run growth in productivity and living standards?
19. Human Capital: EducationGovernment can increase productivity by promoting education–investment in human capital.public schools, subsidized loans for collegeEducation has significant effects: In the U.S., each year of schooling raises a worker’s wage by 10%. Health care expenditure is a type of investment in human capital – healthier workers are more productive. In countries with significant malnourishment, raising workers’ caloric intake raises productivity
20. Technology: Research and DevelopmentR & D: Spending to create and implement new technologies.Technological progress is the main reason why living standards rise over the long run. Policies to promote tech. progress:patent lawstax incentives or direct support for private sector R&Dgrants for basic research at universitiesgovernment R&D: NASA, Center for Disease Control
21. Property Rights and Political StabilityRecall: Markets are usually a good way to organize economic activity. The price system allocates resources to their most efficient uses. This assumes private ownership of resources. This requires respect for property rights, the ability of people to exercise authority over the resources they own.
22. Property Rights and Political StabilityEconomic stability, efficiency, and healthy growth require law enforcement, effective courts, a stable constitution, and honest government officials. In many poor countries, the justice system doesn’t work very well - fraud, corruption and bribery are commonPolitical instability (e.g., frequent coups) creates uncertainty over whether property rights will be protected in the future. Investment in human & physical capital will be lower if people and corporations are fearful that they may lose their property.
23. Is World Growth Sustainable?Sustainable: describes continued long-run economic growth in the face of limited supply of natural resources and exponential population growth.Technological progress often yields ways to avoid these limits:Hybrid cars use less gas.Better insulation in homes reduces the energy required to heat or cool them.As a resource becomes scarcer, its market price rises, which increases the incentive to conserve it and develop alternatives.
24. Population Growth…may affect living standards in 3 different ways:1. Stretching natural resources2. Diluting the capital stock More population per a fixed stock of capital means less capital per workerCapital stock must increase at least as fast as the population to maintain current standards
25. Population Growth3. Promoting tech. progressA larger population may promote technological progress. Throughout history, most technological progress has come from larger population centers where there are more people to discover things and exchange ideas. = more scientists, inventors, engineers= more frequent discoveries= faster tech. progress & economic growth
26. Economic Growth and the EnvironmentChina has achieved tremendous economic growth, but has also increased air pollution in that nation’s cities. Air pollution causes health problems for workers which lower productivity.Air pollution causes a greenhouse effect, which can lead to higher temperatures, create droughts, and other extreme weather events. These events negatively impact economic growth.
27. China’s Pollution