Lecture 3

Production & Growth (Part 1)

(Ch:12; P.O.M.E)

ECO 104
Faculty: Asif Chowdhury

 Economics Growth: refers to a growth in average

income of an economy. By average income its
meant Real GDP per person of an economy.
Income per person indicates the level of well
being of an economy. Economies with higher
income
will have better standard of living
overall. So level of Real GDP is a good measure
of economic well being & growth in the Real GDP
is an indication of how much the economy is
progressing in terms of improving the level of
living standard.

 This growth in average income vary across

countries as well as within a country in
different
time
periods.
Some
countries/economies grow fast while other
countries experience slower growth rate.
Some countries can also experience stagnant
growth situation ( no growth.) This implies
that countries experiencing low level of
average income initially can catch up with
countries with higher level of average income
& hence higher standard of living.

Role of Productivity:
The difference in level of average
income across countries & hence
different levels of standard of living
can be linked to the productivity of
an economy. To understand the role
of productivity as a cause of such
income variation across countries,
we need to look at the factors
determining
an
economys
productivity.

A simple model to understand

Productivity:
We can illustrate the role of productivity in an
economy by considering the hypothetical case of
a fictional marooned sailor; Robinson Crusoe,
making up a single person economy.
Production Activities: Catching fish, growing
vegetables, making own clothes.
Consumption: of the above mentioned products.
Productivity is defined as the quantity of goods &
services produced from each unit of labor input.
In here productivity actually determines Crusoes
standard of living.

 Growth in productivity leads to

higher living standard. Extending this
case of a single person economy to
an actual economy, we can see the
role of productivity in influencing
income level & well being. Growth in
Real GDP means higher output &
higher income. So nation with more
productive work force produces more
goods & services & this in turn leads

 Since productivity has been identified

as the determining force of living
standard, this leads to a question
about why are some nations better in
producing goods & services ( or are
being more productive.) To answer
this question we need to look at the
factors determining productivity.

Factors Determining
Productivity:
Physical capital per worker: The stock of
equipment & structures that are used to
produce goods & services.(Produced mean of
production).
Human capital per worker: The knowledge &
skills that workers acquire through education,
training & experience.
Natural resource per worker: the inputs into the
production of goods & services that are
provided by nature, such as land, river &
mineral deposits.

 Technological
knowledge:
societys
understanding of the best ways of producing
goods & services.
A constant return to scale production
function:
o Y = A F ( L, K, H, N )
o Where A denotes the state of technology.
xY = A F (xL, xK, xH, xN)
Setting x= 1/L
Y/L = A F ( 1, K/L, H/L, N/L)