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 -Yt-1
gt = ´100%
Yt-1

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.

 isthe 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
 theeconomist’s term for the knowledge and skills that
workers acquire through education, training, and
experience
 Like physical capital, human capital raises a nation’s ability to
produce goods and services.

 Eg: German after WW2

 DETERMINANTS OF PRODUCTIVITY
 Natural Resources
 inputsused 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
 Society’s
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