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Lecture 5 Econ1192
Lecture 5 Econ1192
LEARNING OBJECTIVES
In this chapter you will:
analyse the factors that determine a countrys
production and income
consider why labour productivity is the key
determinant of a countrys standard of living
examine how a countrys policies influence its
productivity and economic growth
see how much economic growth differs around the
world, and what the implications are for poverty.
PRODUCTIVITY:
ITS ROLE AND DETERMINANTS
Productivity plays a key role in determining
living standards for all nations in the world.
Productivity refers to the amount of goods
and services produced for each hour of a
workers time.
A nations standard of living is determined by
the productivity of its workers.
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physical capital
human capital
natural resources
technological knowledge.
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HOW PRODUCTIVITY IS
DETERMINED
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.
It is the stock of equipment and structures that
are used to produce goods and services; for
example, the tools used to build or repair cars,
furniture, office buildings or schools.
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HOW PRODUCTIVITY IS
DETERMINED
Human capital
the economists term for the knowledge and skills
that workers acquire through education, training
and experience.
Like physical capital, human capital affects a
nations ability to produce goods and services.
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HOW PRODUCTIVITY IS
DETERMINED
Natural resources are inputs used in
production that are provided by nature.
Renewable resources include forests.
Non-renewable resources include petroleum and
coal.
Natural resources can be important but are not
necessary for an economy to be highly productive
in producing goods and services.
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HOW PRODUCTIVITY IS
DETERMINED
Technological knowledge
This is societys understanding of the best ways
to produce goods and services.
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Education
For a countrys long-run growth, education is
at least as important as investment in
physical capital.
In Australia, each year of schooling raises a
persons wage on an average by about 8 per
cent.
Thus, one way the government can enhance the
standard of living is to provide schools and
encourage the population to take advantage of
them.
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Education
An educated person might generate new
ideas about how best to produce goods and
services, which, in turn, might enter societys
pool of knowledge and provide an external
benefit to others.
One problem facing some poor countries is
the brain drain the emigration of many of
the most highly educated workers to rich
countries.
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Free trade
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.
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Free trade
Some countries engage in:
inward-oriented trade policies, avoiding
interaction with other countries (eg, North
Korea)
outward-oriented trade policies,
encouraging interaction with other
countries. (eg, Singapore)
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Population growth
Economists and other social scientists have long
debated how population growth affects a society.
Population growth interacts with other factors of
production:
stretching natural resources
diluting the capital stock
promoting technological progress.
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SUMMARY
Economic prosperity, as measured by real
GDP per person, varies substantially around
the world.
The standard of living in an economy
depends on the economys ability to produce
goods and services.
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SUMMARY
Productivity depends on the amounts of
physical capital, human capital, natural
resources and technological knowledge
available to workers.
This is illustrated by a production function.
Government policies can influence the
economys growth rate in many different
ways.
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SUMMARY
The accumulation of capital is subject to
diminishing returns.
Because of diminishing returns, higher
saving leads to a higher growth for a period
of time, but growth will eventually slow down.
Also because of diminishing returns, the
return on capital is especially high in poor
countries.
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