LECTURE 3: PRODUCTION AND GROWTH

LECTURE 3: PRODUCTION AND GROWTH

Key questions:
Why some nations are very rich, while others are
very poor?
Why some nations have higher growth rates than
others?
Why some nations in East Asia become prosperous
after 30 years, meanwhile many African nations
have no signal of growth

ECONOMIC GROWTH
Definition:
Economic growth is the increase in the market value
of the goods and services produced by an economy
over time.

ECONOMIC GROWTH
Rule of 70:
Number of years for variable to double = 70/annual
growth rate of variable

Eg:
You deposit 30M into a bank, the annual interest
rate is 7%, your account balance will be doubled
after 10 years: 30 x (1+1%)10 = 60

CATCH-UP EFFECT

The catch-up effect refers to the property whereby

countries that start off poor tend to grow more
rapidly than countries that start off rich.

CATCH-UP EFFECT

MEASURING ECONOMIC GROWTH

Economic growth is conventionally measured as
the percent rate of increase in real gross domestic
product, or real GDP.

Yt Yt1
gt
100%
Yt1
gt: economic growth rate
Y: GDPr

ROLE OF ECONOMIC GROWTH

Living standard of one nation depends on its ability

to produce goods and services

Living standard increases when economy grows

Economic growth means unemployment reduces

THE VARIETY OF GROWTH RATES

ECONOMIC GROWTH AROUND THE WORLD

Living standards, as measured by real GDP per

person, vary significantly among nations.

The poorest countries have average levels of

income that have not been seen in the United
States for many decades.

ECONOMIC GROWTH AROUND THE WORLD

Annual growth rates that seem small become large
when compounded for many years.
Compounding refers to the accumulation of a
growth rate over a period of time.

VIETNAM ECONOMIC GROWTH RATE

(2000 - 2012)

PRODUCTIVITY AND LONG-RUN

ECONOMIC GROWTH

Productivity refers to the amount of goods and

services that a worker can produce from each hour
of work (output per worker)

Productivity plays a key role in determining living

standards for all nations in the world.

Higher productivity is the only source of long run

growth in real GDP per capita.

PRODUCTIVITY AND LONG-RUN

ECONOMIC GROWTH

To understand the large differences in living

standards across countries, we must focus on the
production of goods and services.

DETERMINANTS OF PRODUCTIVITY
- The inputs used to produce goods and services are
called the factors of production.
- The factors of production directly determine
productivity.
- The factors of production:
physical capital
human capital
natural resources
technological knowledge.

DETERMINANTS OF PRODUCTIVITY

Physical Capital
is

a produced factor of production.

It is an input into the production process that in the past was
an output from the production process.

is

the stock of equipment and structures that are used

to produce goods and services.
Tools used to build or repair automobiles.
Tools used to build furniture.
Office buildings, schools, etc.

DETERMINANTS OF PRODUCTIVITY

Human Capital
the

economists term for the knowledge and skills that

workers acquire through education, training, and
experience

Like physical capital, human capital raises a nations ability to

produce goods and services.

Eg: German after WW2

DETERMINANTS OF PRODUCTIVITY

Natural Resources
inputs

used in production that are provided by nature,

such as land, rivers, and mineral deposits.
Renewable resources include trees and forests.
Nonrenewable resources include petroleum and coal.

can

be important but are not necessary for an economy

to be highly productive in producing goods and services.

Eg: Arab Saudi, Japan

DETERMINANTS OF PRODUCTIVITY

Technological Knowledge
Societys

understanding of the best ways to produce

goods and services.

FYI: THE PRODUCTION FUNCTION

Y = A F(L, K, H, N)
Y

= quantity of output
A = available production technology
L = quantity of labor
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F( ) is a function that shows how the inputs are
combined.

ECONOMIC GROWTH AND PUBLIC

POLICY

Government Policies That Raise Productivity and

Living Standards
Encourage

saving and investment.

Encourage investment from abroad
Encourage education and training.
Establish secure property rights and maintain political
stability.
Promote free trade.
Promote research and development.

GROWTH AND INVESTMENT