03 Ch25 SW-832436-17059168647707

CHAPTER 25 Principles of Economics
PRODUCTION AND GROWTH N. Gregory Mankiw
1
PRODUCTION AND GROWTH
25.1 Economic Growth around the World
25.2 Productivity: Its Role and Determinants
25.3 Economic Growth and Public Policy
25.4 Conclusion: The Importance of Long-Run Growth
2
25.1 ECONOMIC GROWTH AROUND THE WORLD
3
 The average income (real GDP per person) in a rich country, such as the United States, Japan, or
Germany, is about 10 times the average income in a poor country, such as India, Nigeria, or
Nicaragua.
 Large differences in income. → Large differences in the quality of life.
 Even within a country, there are large changes in the standard of living over time.
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5
 Growth rate (อัตราการเติบโต) measures how rapidly real income per person grew in the typical year.
 From 1990-2017, GDP per person in China grew at a rate of 9% per year. → From being one
of the poorest countries in the world to being a middle-income country in roughly one
generation.
 Over the same span of time, income per person in Zimbabwe fell by a total of 27%. →
Poverty
 Because of differences in growth rates, ranking of countries by income changes substantially

over time.
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 An economy’s GDP measures both the total income earned in the economy and the total
expenditure on the economy’s output of goods and services.
 The level (ระดับ) of real GDP is a good gauge of economic prosperity.
 The growth (การเติบโต) of real GDP is a good gauge of economic progress.
 In this chapter we focus on the long-run determinants of the level and growth of real GDP.
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25.2 PRODUCTIVITY:
ITS ROLE AND DETERMINANTS
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25.2 PRODUCTIVITY: ITS ROLE AND DETERMINANTS
Why Productivity Is So Important
 To explain why incomes are so much higher in some countries than in others, we must look at
the many factors that determine a nation’s productivity.
 Productivity (ผลิตภาพ) is the quantity of goods and services produced from each unit of labor
input.
 E.g. Robinson Crusoe’s economy
 Productivity is the key determinant of living standards and that growth in productivity is the
key determinant of growth in living standards.
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Why Productivity Is So Important
 Recall that an economy’s GDP measures two things at once: the total income earned by everyone
in the economy and the total expenditure on the economy’s output of goods and services.
 Economy’s income = Economy’s output
 Like Crusoe, a nation can enjoy a high standard of living only if it can produce a large quantity of
goods and services.
 Hence, to understand the large differences in living standards across countries or over time, we
must focus on the production of goods and services.
10
How Productivity Is Determined
 1) Physical capital (ทุนทางกายภาพ)
 2) Human capital (ทุนมนุษย์)
 3) Natural resources (ทรัพยากรธรรมชาติ)
 4) Technological knowledge (ความรู้ทางเทคโนโลยี)
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 1) Physical capital per worker (ทุนทางกายภาพต่อหัว)
 Physical capital (ทุนทางกายภาพ) is the stock of equipment and structures that are used to
produce goods and services.
 More tools allow the workers to produce their output more quickly and more accurately. →
More productive
 Capital is a factor of production used to produce all kinds of goods and services, including
more capital.
12
 2) Human capital per worker (ทุนมนุษย์ต่อหัว)
 Human capital (ทุนมนุษย์) is the knowledge and skills that workers acquire through
education, training, and experience.
 Producing human capital requires inputs in the form of teachers, libraries, and student
time.
13
 3) Natural resources per worker (ทรัพยากรธรรมชาติต่อหัว)
 Natural resources (ทรัพยากรธรรมชาติ) are inputs into the production of goods and services that
are provided by nature, such as land, rivers, and mineral deposits.
 Two forms: renewable (e.g. forest) and nonrenewable (e.g. oil).
 Differences in natural resources are responsible for some of the differences in standards of
living around the world. → E.g. countries with pools of oil
 Although natural resources can be important, they are not necessary for an economy to be
highly productive in producing goods and services.
14
 4) Technological knowledge (ความรู้ทางเทคโนโลยี)
 Technological knowledge (ความรู้ทางเทคโนโลยี) is society’s understanding of the best ways to

produce goods and services.
 Technological change freed up labor, which could then be used to produce other goods and
services.
 Technological knowledge takes many forms:
 Common knowledge (ความรู้ทั่วไป) —after one person uses it, everyone becomes aware of it.
 Proprietary (กรรมสิทธิ์เฉพาะ) —it is known only by the company that discovers it.
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Are Natural Resources a Limit to Growth?
 Today, the world’s population is almost 8 billion, about four times what it was a century ago.
 Many people are enjoying a much higher standard of living than did their great-
grandparents.
 The growth in population and living standards can continue in the future?
 Argument: Natural resources will eventually limit how much the world’s economies can grow.
 Fixed supply of nonrenewable natural resources.
 Shortages → Stop economic growth → Force living standards to fall
16
 Argument: Technological progress often yields ways to avoid these limits.
 Improved use of natural resources over time.
 Recycling allows some nonrenewable resources to be reused.
 Development of new materials.
 Technological progress has made once crucial natural resources less necessary.
 Are these efforts enough to permit continued economic growth?
17
 Answer: Look at the prices of natural resources
 In a market economy, scarcity is reflected in market prices.
 Natural resource prices exhibit substantial short-run fluctuations, but in the long-run, the
prices of most natural resources (adjusted for overall inflation) are stable or falling.
 Our ability to conserve these resources is growing more rapidly than their supplies are
dwindling.
 Market prices give no reason to believe that natural resources are a limit to economic
growth.
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25.3 ECONOMIC GROWTH AND PUBLIC POLICY
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What can government policy do to raise productivity and living standards?
 1) Saving and Investment → Diminishing Returns and the Catch-Up Effect
 2) Investment from Abroad
 3) Education
 4) Health and Nutrition
 5) Property Rights and Political Stability
 6) Free Trade
 7) Research and Development
 8) Population Growth
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1) Saving and Investment (การออมและการลงทุน)
 If today the economy produces a large quantity of new capital goods, then tomorrow it will have a
larger stock of capital and be able to produce more goods and services.
 One way to raise future productivity is to devote more current resources to the production of
capital. But resources are scarce…
 Devoting more resources to produce capital means fewer resources are available to produce
goods and services for current consumption. → Trade-off
 For society to invest more in capital, it must consume less and save more of its current
income to enjoy higher consumption in the future.
21
 Encouraging saving and investment is one way that a government can encourage growth and, in
the long run, raise an economy’s standard of living.
 Raise the nation’s savings rate:
 Fewer resources are needed to make consumption goods
 More resources are available to make capital goods
 Capital stock increases → Rising productivity → More rapid growth in GDP
 How long does this higher rate of growth last?
22
 The traditional view of the production process is that capital is subject to diminishing returns
(การลดลงของผลตอบแทน).
 The benefit from an extra unit of an input declines as the quantity of the input increases.
 Stock of capital rises → Extra output produced from an additional unit of capital falls.
 In other words, when workers already have a large quantity of capital to use in producing
goods and services, giving them an additional unit of capital increases their productivity
only slightly.
 Capital’s diminishing returns is sometimes called the diminishing marginal product of

capital (การลดลงของผลตอบแทนหน่วยสุดท้ายของทุน). (Figure 1)
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 Because of diminishing returns, an increase in the saving rate leads to higher growth only for a
while.
 In the long run, the higher saving rate leads to a higher level of productivity and income
but not to higher growth in productivity or income.
 Reaching this long run, however, can take quite a while. Increasing the saving rate can lead
to substantially higher growth for a period of several decades.
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 The property of diminishing returns to capital has another important implication:
 Other things being equal, poor countries tend to grow at faster rates than rich countries. →
Catch-up effect (การไล่ตามทัน)
 Poor countries → Low productivity → Small amounts of capital investment increase

workers’ productivity substantially
 Rich countries → High productivity → Additional capital investment has a relatively

small effect on productivity
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2) Investment from Abroad
 Foreign Direct Investment (FDI) (การลงทุนโดยตรงจากต่างประเทศ)
 Capital investment that is owned and operated by a foreign entity.
 E.g. Toyota from Japan might build a car factory in Thailand.
 Foreign Portfolio Investment (FPI) (การลงทุนในหลักทรัพย์จากต่างประเทศ)
 Investment financed with foreign money but operated by domestic residents.
 E.g. Foreigners might buy stock in a domestic corporation (buy a share in the ownership).
 In both cases, foreigners provide the resources necessary to increase the stock of capital in
domestic country. → Foreign savings is being used to finance domestic investment.
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 Investment from abroad is one way for a country to grow:
 Increase the economy’s stock of capital
 Higher productivity and higher wages
 Learn the technologies
 When foreigners invest in a country, they do so because they expect to earn a return on their
investment.
 Some benefits flow back to the foreign capital owners in the form of profit.
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 An organization that tries to encourage the flow of capital to poor countries is the World Bank
(ธนาคารโลก).
 Obtains funds from the world’s advanced countries and uses these resources to make loans
to less developed countries. → To invest in roads, schools, and other types of capital.
 Advice about how the funds might best be used.
 International Monetary Fund (IMF) (กองทุนการเงินระหว่างประเทศ)
29
3) Education
 Education is an investment in human capital.
 In the U.S., each year of schooling has historically raised a person’s wage by an average of
about 10 percent.
 In less developed countries, the gap between the wages of educated and uneducated workers
is even larger.
 Opportunity cost of education → Wages forgone
30
3) Education
 Education has positive externalities (ผลกระทบภายนอกทางบวก).
 The return from schooling for society is even greater than the return for the individual.
 Large subsidies to human-capital investment that we observe in the form of public education.
 One problem facing some poor countries is the brain drain (สมองไหล).
 The emigration of many of the most highly educated workers to rich countries, where these
workers can enjoy a higher standard of living.
 If human capital does have positive externalities, then this brain drain makes those people
left behind even poorer.
31
4) Health and Nutrition
 Another type of investment in people: Expenditures that lead to a healthier population.
 Other things being equal, healthier workers are more productive.
 The right investments in the health of the population provide one way for a nation to
increase productivity and raise living standards.
 Historical trends: Long-run economic growth
 Better nutrition → Improve health → Taller workers → More productive → Higher wages
 The effect of height on wages is especially pronounced in poorer countries, where

malnutrition (ภาวะทุพโภชนาการ) is a bigger risk.
32
4) Health and Nutrition
 Vicious circle (วงจรอุบาทว์) in poor countries:
 Poor countries are poor in part because their populations are not healthy.
 Populations are not healthy in part because they are poor and cannot afford adequate
healthcare and nutrition.
 Policies that lead to more rapid economic growth would naturally improve health outcomes,
which in turn would further promote economic growth.
33
5) Property Rights and Political Stability
 Protect property rights (ทรัพยสิทธิ)
 Ability of people to exercise authority over the resources they own.
 Property rights is the prerequisite for the price system to work.
 Courts serve an important role in a market economy. They enforce property rights.
34
5) Property Rights and Political Stability
 One threat to property rights is political instability (การไร้เสถียรภาพทางการเมือง).
 When revolutions (ปฏิวัต)ิ and coups (รัฐประหาร) are common, there is doubt about whether
property rights will be respected in the future.
 Domestic residents have less incentive to save, invest, and start new businesses.
 Foreigners have less incentive to invest in the country.
 Economic prosperity depends in part on favorable political institutions.
 A country with an efficient court system, honest government officials, and a stable
constitution will enjoy a higher standard of living.
35
6) Free Trade (การค้าเสรี)
 Inward-oriented policies (นโยบายมุ่งเน้นภายใน/แบบปิด)
 Increase productivity and living standards within the country by avoiding interaction with
the rest of the world.
 Domestic firms often advance the infant-industry (อุตสาหกรรมในช่วงเริ่มต้น) argument, claiming that
they need protection from foreign competition to thrive and grow.
 Policymakers in less developed countries impose tariffs and other trade restrictions.
 Adverse effect on economic growth.
36
 Outward-oriented policies (นโยบายมุ่งเน้นภายนอก/แบบเปิด)
 Integrate into the world economy.
 International trade in goods and services can improve the economic well-being of a country’s
citizens.
 Trade is, in some ways, a type of technology. A country that eliminates trade restrictions
will experience the same kind of economic growth that would occur after a major
technological advance.
 High rates of economic growth.
37
 Amount of trade determined by:
 Government policy
 Geography
 Easier to trade for countries with natural seaports.
 Landlocked countries find international trade more difficult.
38
7) Research and Development
 The primary reason that living standards are higher today than they were a century ago is that
technological knowledge has advanced.
 Most technological advances come from private research by firms and individual inventors,
but there is also a public interest in promoting these efforts.
 To a large extent, knowledge is a public good (สินค้าสาธารณะ).
 Once one person discovers an idea, the idea enters society’s pool of knowledge and other
people can freely use it.
39
7) Research and Development
 Government has a role in providing a public good such as national defense, it also has a role in
encouraging the research and development of new technologies.
 Government sponsored research
 Research grants
 Tax breaks for firms engaging in research and development
 Patent system (สิทธิบัตร)
40
8) Population Growth
 Large population → Large labor force
 More workers to produce goods and services
 Larger total output
 More people to consume those goods and services
 Both large and small nations are found at all levels of economic development.
41
 Beyond these obvious effects of population size, population growth interacts with the other
factors of production:
 (1) Stretching Natural Resources
 (2) Diluting the Capital Stock
 (3) Promoting Technological Progress
42
 (1) Stretching Natural Resources
 Thomas Robert Malthus (1766–1834), an English minister and early economic thinker:
 Malthus argued that an ever-increasing population would continually strain society’s ability
to provide for itself.
 The power of population is infinitely greater than the power in the earth to produce
subsistence for man.
 Growth in human ingenuity has offset the effects of a larger population.
43
 High population growth → A smaller quantity of capital per worker → Lower productivity per
worker → Lower GDP per worker
 This problem is most apparent in the case of human capital. Educational attainment tends
to be low in countries with high population growth.
 Rapid population growth makes it harder to provide workers with the tools and skills they
need to achieve high levels of productivity.
44
 Rapid population growth is not the main reason that less developed countries are poor, but some
analysts believe that reducing the rate of population growth would help these countries raise
their standards of living.
 Government regulations e.g. China’s one child policy during 1980-2015
 Increasing awareness of birth control techniques
 Equal opportunities for women (Bearing a child has an opportunity cost. When the cost
rises, people choose to have smaller families.)
45
 (3) Promoting Technological Progress
 World population growth has been an engine of technological progress and economic prosperity.
 More people → More scientists, more inventors, more engineers to contribute to

technological advance, which benefits everyone.
46
Why Is So Much of Africa Poor?
 World’s poorest live in sub-Saharan Africa
 In 2017, GDP per person only $3,489 (23% of global average)
 41% live on less than $1.90 per day
 What explains this low level of economic development?
 Low capital investment due to: Low educational attainment, Poor health, High population
growth, Geographic disadvantages, Restricted freedom, Rampant corruption, Legacy of
colonization
47
25.4 CONCLUSION:
THE IMPORTANCE OF LONG-RUN GROWTH
48
25.4 CONCLUSION: THE IMPORTANCE OF LONG-RUN GROWTH
 Most of this chapter is summarized in one of the Ten Principles of Economics:
 A country’s standard of living depends on its ability to produce goods and services.
 Policymakers who want to foster growth in living standards must aim to increase their nation’s
productive ability by…
 Encouraging rapid accumulation of the factors of production
 Ensuring that these factors are employed as effectively as possible
 Remarks: The accumulation of capital is subject to diminishing returns.
49
25.4 CONCLUSION: THE IMPORTANCE OF LONG-RUN GROWTH
 Economists differ in their views on the role of government in promoting economic growth.
 Government can support the invisible hand by maintaining property rights and political
stability.
 Government can target and subsidize specific industries that might be especially important
for technological progress.
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THAI DATA https://data.worldbank.org/coun
try/thailand
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CHAPTER 25 Principles of Economics

PRODUCTION AND GROWTH N. Gregory Mankiw

25.2 Productivity: Its Role and Determinants

25.3 Economic Growth and Public Policy

25.4 Conclusion: The Importance of Long-Run Growth

 Large differences in income. → Large differences in the quality of life.

 Because of differences in growth rates, ranking of countries by income changes substantially

 The level (ระดับ) of real GDP is a good gauge of economic prosperity.

 The growth (การเติบโต) of real GDP is a good gauge of economic progress.

 E.g. Robinson Crusoe’s economy

 Economy’s income = Economy’s output

 2) Human capital (ทุนมนุษย์)

 3) Natural resources (ทรัพยากรธรรมชาติ)

 4) Technological knowledge (ความรู้ทางเทคโนโลยี)

 Two forms: renewable (e.g. forest) and nonrenewable (e.g. oil).

 Technological knowledge (ความรู้ทางเทคโนโลยี) is society’s understanding of the best ways to

 Technological knowledge takes many forms:

 Fixed supply of nonrenewable natural resources.

 Shortages → Stop economic growth → Force living standards to fall

 Improved use of natural resources over time.

 Recycling allows some nonrenewable resources to be reused.

 Development of new materials.

 Are these efforts enough to permit continued economic growth?

 In a market economy, scarcity is reflected in market prices.

 2) Investment from Abroad

 4) Health and Nutrition

 5) Property Rights and Political Stability

 7) Research and Development

 Raise the nation’s savings rate:

 Fewer resources are needed to make consumption goods

 More resources are available to make capital goods

 Capital stock increases → Rising productivity → More rapid growth in GDP

 How long does this higher rate of growth last?

 Capital’s diminishing returns is sometimes called the diminishing marginal product of

 Poor countries → Low productivity → Small amounts of capital investment increase

 Rich countries → High productivity → Additional capital investment has a relatively

 Capital investment that is owned and operated by a foreign entity.

 E.g. Toyota from Japan might build a car factory in Thailand.

 Foreign Portfolio Investment (FPI) (การลงทุนในหลักทรัพย์จากต่างประเทศ)

 Investment financed with foreign money but operated by domestic residents.

 Increase the economy’s stock of capital

 Higher productivity and higher wages

 Learn the technologies

 Advice about how the funds might best be used.

 International Monetary Fund (IMF) (กองทุนการเงินระหว่างประเทศ)

 Opportunity cost of education → Wages forgone

 Other things being equal, healthier workers are more productive.

 Historical trends: Long-run economic growth

 The effect of height on wages is especially pronounced in poorer countries, where

 Ability of people to exercise authority over the resources they own.

 Property rights is the prerequisite for the price system to work.

 Foreigners have less incentive to invest in the country.

 Economic prosperity depends in part on favorable political institutions.

 Adverse effect on economic growth.

 Integrate into the world economy.

 High rates of economic growth.

 Easier to trade for countries with natural seaports.

 Landlocked countries find international trade more difficult.