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MACROECONOMICS
Lecturer: DANG HUYEN ANH
Email: Huyenanh098@gmail.com
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Chapter 2
Production and Growth
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Reading materials

•  Gregory Mankiw, Cengage

learning, Principle of
macroeconomics, 9th
edition, chapter 12
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Outline

•  Economic Growth around the world

•  Productivity
•  Policy to promote economic growth
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Economic Growth arround the world

+ Economic Growth is the increase in real
output over time

National income/output: GDP

GDP growth rate GDP per person
Represent how rapidly - Represent for
GDP grew in the typical Living standard
year - GDP/person vary
widely from country
to country

GDPrt – GDPrt-1
GDP growth rate = * 100 (%)
GDP rt-1
+ Economic Growth arround the world

Bangladesh China Japan Vietnam United States

GDP GDP GDP GDP GDP

year Real GDP growth Real GDP2 growth3 Real GDP3 growth4 Real GDP4 growth5 Real GDP5 growth2

2010 115.28 5.57 6087.16 10.64 5700.10 4.19 115.93 6.42 14992.05 2.56

2011 122.73 6.46 6668.54 9.55 5693.52 -0.12 123.17 6.24 15224.55 1.55

2012 130.73 6.52 7192.67 7.86 5778.64 1.50 129.63 5.25 15567.04 2.25

2013 138.60 6.01 7751.44 7.77 5894.23 2.00 136.66 5.42 15853.80 1.84

2014 147.00 6.06 8326.95 7.42 5916.32 0.37 144.83 5.98 16242.53 2.45

2015 156.63 6.55 8913.32 7.04 5988.67 1.22 154.51 6.68 16710.46 2.88

2016 167.77 7.11 9523.77 6.85 6019.93 0.52 164.10 6.21 16972.35 1.57

2017 179.99 7.28 10185.31 6.95 6150.46 2.17 175.28 6.81 17348.63 2.22

2018 194.15 7.86 10872.98 6.75 6170.34 0.32 187.69 7.08 17856.48 2.93

2019 209.97 8.15 11537.16 6.11 6210.70 0.65 200.86 7.02 18273.17 2.33
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Economic growth
and the rule of 70

The rule of 70 : If a variable’s value grows by

g%/year, it will get double value after 70/g years

Rule 70 in economic growth explains: If GDP

grows by g%/year, it will get double value after
70/g years
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Example

Vietnam’s real GDP in 2019 was 200.86 billion USD, and

the annual growth rate is around 6.5%.

When will Vietnam’s GDP get double?

Answer: Vietnam’s GDP will get double (401.72 bill

USD) after 70/6.5 = 11 years, in 2030
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Productivity
+ Productivity
Productivity is represented
by quantity of goods and
services produced from each
unit of labor input

Productivity = Y/L

Why productivity is so important?

Productivit so
In An
y productivity
economy
determines determines
as a whole,
an income,
OUTPUT =
economy’s then, living
INCOME
output standards
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Determinants of productivity
Human
capital per Technological
worker knowledge

Physical
capital per
worker

Natural
resources per
worker
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Physical capital, K

•  Physical capital is the Stock of equipment

and structures used to produce goods
and services

Productivity is higher when the average
worker has more capital (machines,
equipment, etc.).
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Natural resources, N

•  Natural resources are Inputs into the

production that natural provides, such as
land, rivers, and mineral deposits
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Human capital, H

Human capital is 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.)


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Technological knowledge, A

• Technological knowledge is Society’s

understanding of the best ways to produce
goods and services

It can be any advance in knowledge that
boosts productivity and allows society to get
more output from its resources

Technological knowledge vs. Human 17
capital

! Technological knowledge
Refers to society’s understanding of
how to produce goods and services
! Human capital
Results from the effort people
expend to acquire this knowledge
 The Production Function 18

!  Production function is a graph or equation showing the relation

between output and inputs

!  Y = A × F(L, K, H, N)
L: labor
K: Capital
H: human resource
N: Natural resource

A: level of technology

F( ) is a function that shows how inputs are combined to produce

output
!  “A” multiplies the function F( ), so improvements in technology
(increases in “A”) allow more output (Y) to be produced from
any given combination of inputs.
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The Production Function –
Constant returns to scale:

!  Constant
returns to scale: Changing all inputs by
the same percentage causes output to change by
that percentage.

Example:
- Doubling all inputs (multiplying each by 2) causes
output to double:
2Y = A × F(2L, 2K, 2H, 2N)

- Increasing all inputs 10% (multiplying each by 1.1) causes

output to increase by 10%:
1.1Y = A × F(1.1L, 1.1K, 1.1H, 1.1N)
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PRODUCTIVITY FUNCTION

!  If
we multiply each input by 1/L, then
output is multiplied by 1/L:

Y/L = A × F(1, K/L, H/L, N/L)

!  This
equation shows that productivity (Y/L,
output per worker) depends on:

!  The level of technology, A

!  Physical capital per worker, K/L
!  Human capital per worker, H/L
!  Natural resources per worker, N/L
Stop and think?

! Why “A” is outside the production

function?

Unlike physical capital or other resources,
technological knowledge can be freely shared among
all workers.

If the number of workers increases, you must

purchase new capital for the new workers (or spread
the existing capital more thinly), but technological
knowledge can be freely shared with the new workers,
so there is A, not A/L in the production function
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Policy to promote
Economic growth
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Saving and Investment

! Saving and Investment raise future productivity:

Invest more current resources in the production
of capital
! Trade-off of saving and investment: Devote
fewer resources to produce goods and services
for current consumption
+ Saving and Investment - Diminishing Returns

!  Policies that raise saving and investment:

Causing fewer resources are used to make
consumption goods but more resources to make
capital goods (K)
This policy leads to K/L increases, rising
productivity and living standards

Y/L = A × F(1, K/L, H/L, N/L)

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!  The faster growth is

temporary, due to
diminishing returns to
capital.
!  Therefore, in the long run,
higher savings rate lead to
higher level of productivity
and income. But not higher
growth in productivity or
income.
Diminishing returns
to capital: As K
rises, the extra
output from an
additional unit of K
falls.
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Catch-up effect:
Countries that start off poor tend to grow
more rapidly than countries that start off
rich

Rich countries: High productivity but

Additional capital investment causes small
effect on productivity
Poorer countries: Tend to grow faster than
rich countries
Diminishing Returns - Illustrating catch - up effect
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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. When the economy has a low level of

capital, an extra unit of capital leads to a
1 large increase in output.

Capital 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.
+ Investment from Abroad
Investment from abroad is another way for a country
to invest in new capital, includes:
! Foreign direct investment (FDI): Capital investment
that is owned and operated by a foreign entity
! Foreign portfolio investment: Investment financed
with foreign money but operated by domestic
residents
+ Education – Health and Nutrition
•  Education
–  Investment in human capital
–  Gap between wages of educated and uneducated workers

–  Public education – large subsidies to human-capital

investment
–  Problem for poor countries: Brain drain

•  Health and Nutrition: Expenditures that lead to a healthier

population. Healthier workers lead to More productive
•  Right investments in the health of the population: Increase
productivity and Raise living standards
•  Nutrition: long-run economic growth: Improved health – from
better nutrition promotes to long-run economic growth
Vicious circle in poor countries
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Would

naturally

improve
Policies that Poor countries are Populations are health
lead to poor Because their not healthy outcomes
more rapid populations are not Because they are Which in
economic healthy poor and cannot
turn
growth afford better
healthcare and would

nutrition further

promote

economic

growth




+ Property Rights and Political Stability

!  To foster economic growth

!  Protectproperty rights (the ability of people to
exercise authority over the resources they own)
!  Promote political stability
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Free Trade
Inward-oriented policies Outward-oriented policies
!  Avoid interaction with the - Integrate into the world
rest of the world economy
!  Infant-industry argument
-  Promote international
trade in goods and services
!  Tariffs
-  Enhance economic growth
!  Other trade restrictions -  Amount of trade –
!  Adverse effect on economic determined by:
growth Government policy and
Geography



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Research and Development

!  Government – encourages research and development:
!  Farming methods
!  Aerospace research (Air Force; NASA)
!  Research grants
!  National Science Foundation
!  National Institutes of Health
!  Tax breaks
!  Patent system
+ Population Growth
Large population:
Advantages Disadvantages

Promoting technological progress Stretching natural resources:

•  More people = More Malthus theory: an ever-increasing
scientists, more inventors, population
more engineers = More •  Strain society’s ability to
frequent discoveries provide for itself
Besides, •  Mankind – doomed to
•  More workers to produce forever live in poverty
goods and services: larger Diluting the capital stock:
total output of goods and High population growth lead to
services •  Spread the capital stock
•  More consumers more thinly
•  Lower productivity per
To Reducing the rate of population worker
growth •  Lower GDP per worker
• Government regulation
• Increased awareness of birth control
• Equal opportunities for women