宏观经济学原理-第五版-英文原版课件macro-ch12-presentation

ProductionandGrowthMacroeonomicsPRINCIPLESOFN.GregoryMankiwPremiumPowerPointSlides

byRonCronovich12ProductionandGrowthMacroeonoInthischapter,

lookfortheanswerstothesequestions:Whatarethefactsaboutlivingstandardsandgrowthratesaroundtheworld?Whydoesproductivitymatterforlivingstandards?Whatdeterminesproductivityanditsgrowthrate?Howcanpublicpolicyaffectgrowthandlivingstandards?11PRODUCTIONANDGROWTHInthischapter,

lookfortheAtypicalfamilywithalltheirpossessionsintheU.K.,anadvancedeconomyGDPpercapita: $35,580Lifeexpectancy: 79yearsAdultliteracy: 99%2PRODUCTIONANDGROWTHAtypicalfamilywithalltheiAtypicalfamilywithalltheirpossessionsinMexico,amiddleincomecountryGDPpercapita: $11,410Lifeexpectancy: 76yearsAdultliteracy: 92%3PRODUCTIONANDGROWTHAtypicalfamilywithalltheiAtypicalfamilywithalltheirpossessionsinMali,apoorcountryGDPpercapita: $1,130Lifeexpectancy: 50yearsAdultliteracy: 46%4PRODUCTIONANDGROWTHAtypicalfamilywithalltheiGDPpercapita,2005Growthrate,1960-2005China$6,5725.8%Singapore29,9215.4%Japan30,8213.8%Spain26,1253.2%India3,4862.7%Israel25,6702.7%UnitedStates41,8542.2%Canada32,8862.1%Colombia7,7691.8%NewZealand22,5111.4%Philippines4,9201.4%Argentina14,4211.0%SaudiArabia14,7290.8%Rwanda1,3330.3%Haiti1,836–1.2%Incomes

andGrowthAroundtheWorldFACT1:Therearevastdifferences

inlivingstandardsaroundtheworld.5PRODUCTIONANDGROWTHGDPpercapita,2005GrowthratGDPpercapita,2005Growthrate,1960-2005China$6,5725.8%Singapore29,9215.4%Japan30,8213.8%Spain26,1253.2%India3,4862.7%Israel25,6702.7%UnitedStates41,8542.2%Canada32,8862.1%Colombia7,7691.8%NewZealand22,5111.4%Philippines4,9201.4%Argentina14,4211.0%SaudiArabia14,7290.8%Rwanda1,3330.3%Haiti1,836–1.2%Incomes

andGrowthAroundtheWorldFACT2:Thereisalsogreatvariation

ingrowthratesacrosscountries.6PRODUCTIONANDGROWTHGDPpercapita,2005GrowthratIncomesandGrowthAroundtheWorldSincegrowthratesvary,thecountryrankingscanchangeovertime:Poorcountriesarenotnecessarilydoomedtopovertyforever–e.g.,Singapore,incomeswerelowin1960andarequitehighnow.Richcountriescan’ttaketheirstatusforgranted:Theymaybeovertakenbypoorerbut

faster-growingcountries.7PRODUCTIONANDGROWTHIncomesandGrowthAroundtheIncomesandGrowthAroundtheWorldQuestions:Whyaresomecountriesricherthanothers?Whydosomecountriesgrowquicklywhileothersseemstuckinapovertytrap?Whatpoliciesmayhelpraisegrowthratesandlong-runlivingstandards?8PRODUCTIONANDGROWTHIncomesandGrowthAroundtheProductivityRecalloneoftheTenPrinciplesfromChap.1:

Acountry’sstandardoflivingdepends

onitsabilitytoproduceg&s.Thisabilitydependson

productivity,theaveragequantityofg&sproducedperunitoflaborinput.Y=realGDP=quantityofoutputproduced

L=quantityoflabor

soproductivity=Y/L(outputperworker)9PRODUCTIONANDGROWTHProductivityRecalloneoftheWhyProductivityIsSoImportantWhenanation’sworkersareveryproductive,realGDPislargeandincomesarehigh.Whenproductivitygrowsrapidly,sodolivingstandards.What,then,determinesproductivityanditsgrowthrate?10PRODUCTIONANDGROWTHWhyProductivityIsSoImportaPhysicalCapitalPerWorkerRecall:Thestockofequipmentandstructuresusedtoproduceg&siscalled[physical]

capital,denotedK.K/L=capitalperworker.Productivityishigherwhentheaverageworkerhasmorecapital(machines,equipment,etc.).i.e.,

anincreaseinK/LcausesanincreaseinY/L.11PRODUCTIONANDGROWTHPhysicalCapitalPerWorkerRecHumanCapitalPerWorkerHumancapital(H):

theknowledgeandskillsworkersacquirethrougheducation,training,andexperienceH/L=theaverageworker’shumancapitalProductivityishigherwhentheaverageworkerhasmorehumancapital(education,skills,etc.).i.e.,

anincreaseinH/LcausesanincreaseinY/L.12PRODUCTIONANDGROWTHHumanCapitalPerWorkerHumanNaturalResourcesPerWorkerNaturalresources(N):theinputsintoproductionthatnatureprovides,e.g.,land,mineraldepositsOtherthingsequal,

moreNallowsacountrytoproducemoreY. Inper-workerterms,

anincreaseinN/LcausesanincreaseinY/L.Somecountriesarerichbecausetheyhaveabundantnaturalresources

(e.g.,SaudiArabiahaslotsofoil).ButcountriesneednothavemuchNtoberich

(e.g.,JapanimportstheNitneeds).13PRODUCTIONANDGROWTHNaturalResourcesPerWorkerNaTechnologicalKnowledgeTechnologicalknowledge:society’sunderstandingofthebestwaystoproduceg&sTechnologicalprogressdoesnotonlymean

afastercomputer,ahigher-definitionTV,

orasmallercellphone.Itmeansanyadvanceinknowledgethatboostsproductivity(allowssocietytogetmoreoutputfromitsresources).E.g.,HenryFordandtheassemblyline.14PRODUCTIONANDGROWTHTechnologicalKnowledgeTechnolTech.Knowledgevs.HumanCapitalTechnologicalknowledgereferstosociety’sunderstandingofhowtoproduceg&s.Humancapitalresultsfromtheeffortpeopleexpendtoacquirethisknowledge.Bothareimportantforproductivity.15PRODUCTIONANDGROWTHTech.Knowledgevs.HumanCapiTheProductionFunctionTheproductionfunctionisagraphorequationshowingtherelationbetweenoutputandinputs:

Y=A

F(L,K,H,N) F()–afunctionthatshowshowinputsarecombinedtoproduceoutput “A”–theleveloftechnology“A”multipliesthefunctionF(),

soimprovementsintechnology(increasesin“A”)allowmoreoutput(Y)tobeproducedfromanygivencombinationofinputs.16PRODUCTIONANDGROWTHTheProductionFunctionTheproTheProductionFunctionTheproductionfunctionhastheproperty

constantreturnstoscale:Changingallinputs

bythesamepercentagecausesoutputtochangebythatpercentage.Forexample,Doublingallinputs(multiplyingeachby2)

causesoutputtodouble:Y=A

F(L,K,H,N)2Y=A

F(2L,2K,2H,2N)Increasingallinputs10%(multiplyingeachby1.1)causesoutputtoincreaseby10%:1.1Y=A

F(1.1L,1.1K,1.1H,1.1N)17PRODUCTIONANDGROWTHTheProductionFunctionTheproTheProductionFunctionIfwemultiplyeachinputby1/L,then

outputismultipliedby1/L: Y/L=A

F(1,K/L,H/L,N/L)Thisequationshowsthatproductivity

(outputperworker)dependson:theleveloftechnology(A)physicalcapitalperworkerhumancapitalperworkernaturalresourcesperworkerY=A

F(L,K,H,N)18PRODUCTIONANDGROWTHTheProductionFunctionIfwemWhichofthefollowingpoliciesdoyouthinkwould

bemosteffectiveatboostinggrowthandlivingstandardsinapoorcountryoverthelongrun?a. Offertaxincentivesforinvestmentbylocalfirmsb. ”””””byforeignfirmsc. Givecashpaymentsforgoodschoolattendanced. Crackdownongovtcorruptione. Restrictimportstoprotectdomesticindustriesf. Allowfreetradeg. GiveawaycondomsACTIVELEARNING1

DiscussionQuestion1919PRODUCTIONANDGROWTHWhichofthefollowingpolicieECONOMICGROWTH

ANDPUBLICPOLICYNext,welookattheways

publicpolicycanaffect

long-rungrowthinproductivity

andlivingstandards.20PRODUCTIONANDGROWTHECONOMICGROWTH

ANDPUBLICPOSavingandInvestmentWecanboostproductivitybyincreasingK,

whichrequiresinvestment.Sinceresourcesscarce,producingmorecapitalrequiresproducingfewerconsumptiongoods.Reducingconsumption=increasingsaving.

Thisextrasavingfundstheproductionofinvestmentgoods.(Moredetailsinthenextchapter.)Hence,atradeoffbetweencurrentandfutureconsumption.21PRODUCTIONANDGROWTHSavingandInvestmentWecanboDiminishingReturnsandtheCatch-UpEffectThegovtcanimplementpoliciesthatraisesavingandinvestment.(Detailsinnextchapter.)

ThenKwillrise,causingproductivityandlivingstandardstorise.Butthisfastergrowthistemporary,

duetodiminishingreturnstocapital:

AsKrises,theextraoutputfromanadditionalunitofKfalls….22PRODUCTIONANDGROWTHDiminishingReturnsandtheCaOutputperworker(productivity)TheProductionFunction&DiminishingReturnsK/LY/LCapitalperworkerIfworkers

havelittleK,

givingthemmoreincreasestheirproductivityalot.IfworkersalreadyhavealotofK,

givingthemmoreincreasesproductivity

fairlylittle.23PRODUCTIONANDGROWTHOutputperworker(productivit thepropertywherebypoorcountriestendtogrowmorerapidlythanrichonesThecatch-upeffect:K/LY/LPoorcountrystartshereRichcountrystartsherePoorcountry’sgrowthRichcountry’sgrowth24PRODUCTIONANDGROWTH thepropertywherebypoorExampleoftheCatch-UpEffectOver1960-1990,theU.S.andS.KoreadevotedasimilarshareofGDPtoinvestment,soyoumightexpecttheywouldhavesimilargrowthperformance.Butgrowthwas>6%inKoreaandonly2%intheU.S.Explanation:thecatch-upeffect.

In1960,K/LwasfarsmallerinKoreathan

intheU.S.,henceKoreagrewfaster.25PRODUCTIONANDGROWTHExampleoftheCatch-UpEffectInvestmentfromAbroadToraiseK/Landhenceproductivity,wages,andlivingstandards,thegovtcanalsoencourageforeigndirectinvestment:

acapitalinvestment(e.g.,factory)thatis

owned&operatedbyaforeignentityforeignportfolioinvestment:

acapitalinvestmentfinancedwithforeignmoneybutoperatedbydomesticresidentsSomeofthereturnsfromtheseinvestments

flowbacktotheforeigncountriesthatsupplied

thefunds.26PRODUCTIONANDGROWTHInvestmentfromAbroadToraiseInvestmentfromAbroadEspeciallybeneficialinpoorcountriesthatcannotgenerateenoughsavingtofundinvestmentprojectsthemselves.Alsohelpspoorcountrieslearnstate-of-the-arttechnologiesdevelopedinothercountries.27PRODUCTIONANDGROWTHInvestmentfromAbroadEspecialEducationGovtcanincreaseproductivitybypromotingeducation–investmentinhumancapital(H).Publicschools,subsidizedloansforcollegeEducationhassignificanteffects:IntheU.S.,eachyearofschoolingraisesaworker’swageby10%.ButinvestinginHalsoinvolvesatradeoff

betweenthepresent&future:

Spendingayearinschoolrequiressacrificing

ayear’swagesnowtohavehigherwageslater.28PRODUCTIONANDGROWTHEducationGovtcanincreaseproHealthandNutritionHealthcareexpenditureisatypeofinvestmentinhumancapital–healthierworkersaremoreproductive.Incountrieswithsignificantmalnourishment,raisingworkers’caloricintakeraisesproductivity:Over1962-95,caloricconsumptionrose44%inS.Korea,andeconomicgrowthwasspectacular.NobelwinnerRobertFogel:

30%ofGreatBritain’sgrowthfrom1790-1980wasduetoimprovednutrition.29PRODUCTIONANDGROWTHHealthandNutritionHealthcarPropertyRightsandPoliticalStabilityRecall:

Marketsareusuallyagood

waytoorganizeeconomicactivity.

Thepricesystemallocatesresources

totheirmostefficientuses.Thisrequiresrespectforpropertyrights,theabilityofpeopletoexerciseauthorityovertheresourcestheyown.30PRODUCTIONANDGROWTHPropertyRightsandPoliticalPropertyRightsandPoliticalStabilityInmanypoorcountries,thejusticesystemdoesn’tworkverywell:Contractsaren’talwaysenforcedFraud,corruptionoftengounpunishedInsome,firmsmustbribegovtofficialsforpermitsPoliticalinstability(e.g.,frequentcoups)createsuncertaintyoverwhetherpropertyrightswillbeprotectedinthefuture.31PRODUCTIONANDGROWTHPropertyRightsandPoliticalPropertyRightsandPoliticalStabilityWhenpeoplefeartheircapitalmaybestolenbycriminalsorconfiscatedbyacorruptgovt,

thereislessinvestment,includingfromabroad,andtheeconomyfunctionslessefficiently.

Result:lowerlivingstandards.Economicstability,efficiency,andhealthygrowthrequirelawenforcement,effectivecourts,

astableconstitution,andhonestgovtofficials.32PRODUCTIONANDGROWTHPropertyRightsandPoliticalFreeTradeInward-orientedpolicies

(e.g.,tariffs,limitsoninvestmentfromabroad)aimtoraiselivingstandardsbyavoidinginteractionwithothercountries.Outward-orientedpolicies(e.g.,theeliminationofrestrictionsontradeorforeigninvestment)promoteintegrationwiththeworldeconomy.33PRODUCTIONANDGROWTHFreeTradeInward-orientedpoliFreeTradeRecall:Tradecanmakeeveryonebetteroff.Tradehassimilareffectsasdiscoveringnewtechnologies–itimprovesproductivityandlivingstandards.Countrieswithinward-orientedpolicieshavegenerallyfailedtocreategrowth.E.g.,Argentinaduringthe20thcentury.Countrieswithoutward-orientedpolicieshave

oftensucceeded.E.g.,SouthKorea,Singapore,Taiwanafter1960.34PRODUCTIONANDGROWTHFreeTradeRecall:TradecanmResearchandDevelopmentTechnologicalprogressisthemainreasonwhylivingstandardsriseoverthelongrun.Onereasonisthatknowledgeisapublicgood:Ideascanbesharedfreely,increasingtheproductivityofmany.Pgress:PatentlawsTaxincentivesordirectsupportfor

privatesectorR&DGrantsforbasicresearchatuniversities35PRODUCTIONANDGROWTHResearchandDevelopmentTechnoPopulationGrowth…mayaffectlivingstandardsin3differentways:1.Stretchingnaturalresources200yearsago,Malthusarguedthatpop.growthwouldstrainsociety’sabilitytoprovideforitself.Sincethen,theworldpopulationhasincreasedsixfold.IfMalthuswasright,livingstandardswouldhavefallen.Instead,they’verisen.Malthusfailedtoaccountfortechnologicalprogressandproductivitygrowth.36PRODUCTIONANDGROWTHPopulationGrowth…mayaffectlPopulationGrowth2.Dilutingthecapitalstock

Biggerpopulation=higherL=lowerK/L

=lowerproductivity&livingstandards.ThisappliestoHaswellasK:

fastpop.growth=morechildren

=greaterstrainoneducationalsystem.Countrieswithfastpop.growthtendtohavelowereducationalattainment.37PRODUCTIONANDGROWTHPopulationGrowth2.DilutingPopulationGrowthTocombatthis,manydevelopingcountriesusepolicytocontrolpopulationgrowth.China’sonechildperfamilylawsContraceptioneducation&availabilityPromotefemaleliteracytoraiseopportunitycostofhavingbabies2.Dilutingthecapitalstock

38PRODUCTIONANDGROWTHPopulationGrowthTocombatthiPopulationGrowth3.PgressMorepeople=morescientists,inventors,engineers=morefrequentdiscoveries=gress&economicgrowthEvidencefromMichaelKremer:

Overthecourseofhumanhistory,growthratesincreasedastheworld’spopulationincreasedmorepopulatedregionsgrewfasterthan

lesspopulatedones39PRODUCTIONANDGROWTHPopulationGrowth3.PromotingListthedeterminantsofproductivity.Listthreepoliciesthatattempttoraiselivingstandardsbyincreasingoneofthedeterminantsofproductivity.ACTIVELEARNING2

Reviewproductivityconcepts4040PRODUCTIONANDGROWTHListthedeterminantsofproduDeterminantsofproductivity:

K/L,physicalcapitalperworker

H/L,humancapitalperworker

N/L,naturalresourcesperworker

A,technologicalknowledgePoliciestoboostproductivity:Encouragesavingandinvestment,toraiseK/LEncourageinvestmentfromabroad,toraiseK/LProvidepubliceducation,toraiseH/LACTIVELEARNING2

Answers4141PRODUCTIONANDGROWTHDeterminantsofproductivity:

Determinantsofproductivity:

K/L,physicalcapitalperworker

H/L,humancapitalperworker

N/L,naturalresourcesperworker

A,technologicalknowledgePoliciestoboostproductivity:Patentlawsorgrants,toincreaseAControlpopulationgrowth,toincreaseK/LACTIVELEARNING2

Answers4242PRODUCTIONANDGROWTHDeterminantsofproductivity:

AreNaturalResourcesaLimittoGrowth?SomearguethatpopulationgrowthisdepletingtheEarth’snon-renewableresources,andthuswilllimitgrowthinlivingstandards.Buttechnologicalprogressoftenyieldswaystoavoidtheselimits:Hybridcarsuselessgas.Betterinsulationinhomesreducestheenergyrequiredtoheatorcoolthem.Asaresourcebecomesscarcer,itsmarketpricerises,whichincreasestheincentivetoconserveitanddevelopalternatives.43PRODUCTIONANDGROWTHAreNaturalResourcesaLimitCONCLUSIONInthelongrun,livingstandardsaredeterminedbyproductivity.Policiesthataffectthedeterminantsofproductivitywillthereforeaffectthenextgeneration’slivingstandards.Oneofthesedeterminantsissavingandinvestment.Inthenextchapter,wewilllearnhowsavingandinvestmentaredetermined,andhowpoliciescanaffectthem.44PRODUCTIONANDGROWTHCONCLUSIONInthelongrun,livCHAPTERSUMMARYTherearegreatdifferencesacrosscountriesinlivingstandardsandgrowthrates.Productivity(outputperunitoflabor)isthemaindeterminantoflivingstandardsinthelongrun.Productivitydependsonphysicalandhumancapitalperworker,naturalresourcesperworker,andtechnologicalknowledge.Growthinthesefactors–especiallytechnologicalprogress–causesgrowthinlivingstandardsoverthelongrun.4545PRODUCTIONANDGROWTHCHAPTERSUMMARYTherearegreatCHAPTERSUMMARYPoliciescanaffectthefollowing,eachofwhichhasimportanteffectsongrowth:SavingandinvestmentInternationaltradeEducation,health&nutritionPropertyrightsandpoliticalstabilityResearchanddevelopmentPopulationgrowthBecauseofdiminishingreturnstocapital,

growthfrominvestmenteventuallyslowsdown,

andpoorcountriesmay“catchup”torichones.4646PRODUCTIONANDGROWTHCHAPTERSUMMARYPoliciescanafProductionandGrowthMacroeonomicsPRINCIPLESOFN.GregoryMankiwPremiumPowerPointSlides

byRonCronovich12ProductionandGrowthMacroeonoInthischapter,

lookfortheanswerstothesequestions:Whatarethefactsaboutlivingstandardsandgrowthratesaroundtheworld?Whydoesproductivitymatterforlivingstandards?Whatdeterminesproductivityanditsgrowthrate?Howcanpublicpolicyaffectgrowthandlivingstandards?4848PRODUCTIONANDGROWTHInthischapter,

lookfortheAtypicalfamilywithalltheirpossessionsintheU.K.,anadvancedeconomyGDPpercapita: $35,580Lifeexpectancy: 79yearsAdultliteracy: 99%49PRODUCTIONANDGROWTHAtypicalfamilywithalltheiAtypicalfamilywithalltheirpossessionsinMexico,amiddleincomecountryGDPpercapita: $11,410Lifeexpectancy: 76yearsAdultliteracy: 92%50PRODUCTIONANDGROWTHAtypicalfamilywithalltheiAtypicalfamilywithalltheirpossessionsinMali,apoorcountryGDPpercapita: $1,130Lifeexpectancy: 50yearsAdultliteracy: 46%51PRODUCTIONANDGROWTHAtypicalfamilywithalltheiGDPpercapita,2005Growthrate,1960-2005China$6,5725.8%Singapore29,9215.4%Japan30,8213.8%Spain26,1253.2%India3,4862.7%Israel25,6702.7%UnitedStates41,8542.2%Canada32,8862.1%Colombia7,7691.8%NewZealand22,5111.4%Philippines4,9201.4%Argentina14,4211.0%SaudiArabia14,7290.8%Rwanda1,3330.3%Haiti1,836–1.2%Incomes

andGrowthAroundtheWorldFACT1:Therearevastdifferences

inlivingstandardsaroundtheworld.52PRODUCTIONANDGROWTHGDPpercapita,2005GrowthratGDPpercapita,2005Growthrate,1960-2005China$6,5725.8%Singapore29,9215.4%Japan30,8213.8%Spain26,1253.2%India3,4862.7%Israel25,6702.7%UnitedStates41,8542.2%Canada32,8862.1%Colombia7,7691.8%NewZealand22,5111.4%Philippines4,9201.4%Argentina14,4211.0%SaudiArabia14,7290.8%Rwanda1,3330.3%Haiti1,836–1.2%Incomes

andGrowthAroundtheWorldFACT2:Thereisalsogreatvariation

ingrowthratesacrosscountries.53PRODUCTIONANDGROWTHGDPpercapita,2005GrowthratIncomesandGrowthAroundtheWorldSincegrowthratesvary,thecountryrankingscanchangeovertime:Poorcountriesarenotnecessarilydoomedtopovertyforever–e.g.,Singapore,incomeswerelowin1960andarequitehighnow.Richcountriescan’ttaketheirstatusforgranted:Theymaybeovertakenbypoorerbut

faster-growingcountries.54PRODUCTIONANDGROWTHIncomesandGrowthAroundtheIncomesandGrowthAroundtheWorldQuestions:Whyaresomecountriesricherthanothers?Whydosomecountriesgrowquicklywhileothersseemstuckinapovertytrap?Whatpoliciesmayhelpraisegrowthratesandlong-runlivingstandards?55PRODUCTIONANDGROWTHIncomesandGrowthAroundtheProductivityRecalloneoftheTenPrinciplesfromChap.1:

Acountry’sstandardoflivingdepends

onitsabilitytoproduceg&s.Thisabilitydependson

productivity,theaveragequantityofg&sproducedperunitoflaborinput.Y=realGDP=quantityofoutputproduced

L=quantityoflabor

soproductivity=Y/L(outputperworker)56PRODUCTIONANDGROWTHProductivityRecalloneoftheWhyProductivityIsSoImportantWhenanation’sworkersareveryproductive,realGDPislargeandincomesarehigh.Whenproductivitygrowsrapidly,sodolivingstandards.What,then,determinesproductivityanditsgrowthrate?57PRODUCTIONANDGROWTHWhyProductivityIsSoImportaPhysicalCapitalPerWorkerRecall:Thestockofequipmentandstructuresusedtoproduceg&siscalled[physical]

capital,denotedK.K/L=capitalperworker.Productivityishigherwhentheaverageworkerhasmorecapital(machines,equipment,etc.).i.e.,

anincreaseinK/LcausesanincreaseinY/L.58PRODUCTIONANDGROWTHPhysicalCapitalPerWorkerRecHumanCapitalPerWorkerHumancapital(H):

theknowledgeandskillsworkersacquirethrougheducation,training,andexperienceH/L=theaverageworker’shumancapitalProductivityishigherwhentheaverageworkerhasmorehumancapital(education,skills,etc.).i.e.,

anincreaseinH/LcausesanincreaseinY/L.59PRODUCTIONANDGROWTHHumanCapitalPerWorkerHumanNaturalResourcesPerWorkerNaturalresources(N):theinputsintoproductionthatnatureprovides,e.g.,land,mineraldepositsOtherthingsequal,

moreNallowsacountrytoproducemoreY. Inper-workerterms,

anincreaseinN/LcausesanincreaseinY/L.Somecountriesarerichbecausetheyhaveabundantnaturalresources

(e.g.,SaudiArabiahaslotsofoil).ButcountriesneednothavemuchNtoberich

(e.g.,JapanimportstheNitneeds).60PRODUCTIONANDGROWTHNaturalResourcesPerWorkerNaTechnologicalKnowledgeTechnologicalknowledge:society’sunderstandingofthebestwaystoproduceg&sTechnologicalprogressdoesnotonlymean

afastercomputer,ahigher-definitionTV,

orasmallercellphone.Itmeansanyadvanceinknowledgethatboostsproductivity(allowssocietytogetmoreoutputfromitsresources).E.g.,HenryFordandtheassemblyline.61PRODUCTIONANDGROWTHTechnologicalKnowledgeTechnolTech.Knowledgevs.HumanCapitalTechnologicalknowledgereferstosociety’sunderstandingofhowtoproduceg&s.Humancapitalresultsfromtheeffortpeopleexpendtoacquirethisknowledge.Bothareimportantforproductivity.62PRODUCTIONANDGROWTHTech.Knowledgevs.HumanCapiTheProductionFunctionTheproductionfunctionisagraphorequationshowingtherelationbetweenoutputandinputs:

Y=A

F(L,K,H,N) F()–afunctionthatshowshowinputsarecombinedtoproduceoutput “A”–theleveloftechnology“A”multipliesthefunctionF(),

soimprovementsintechnology(increasesin“A”)allowmoreoutput(Y)tobeproducedfromanygivencombinationofinputs.63PRODUCTIONANDGROWTHTheProductionFunctionTheproTheProductionFunctionTheproductionfunctionhastheproperty

constantreturnstoscale:Changingallinputs

bythesamepercentagecausesoutputtochangebythatpercentage.Forexample,Doublingallinputs(multiplyingeachby2)

causesoutputtodouble:Y=A

F(L,K,H,N)2Y=A

F(2L,2K,2H,2N)Increasingallinputs10%(multiplyingeachby1.1)causesoutputtoincreaseby10%:1.1Y=A

F(1.1L,1.1K,1.1H,1.1N)64PRODUCTIONANDGROWTHTheProductionFunctionTheproTheProductionFunctionIfwemultiplyeachinputby1/L,then

outputismultipliedby1/L: Y/L=A

F(1,K/L,H/L,N/L)Thisequationshowsthatproductivity

(outputperworker)dependson:theleveloftechnology(A)physicalcapitalperworkerhumancapitalperworkernaturalresourcesperworkerY=A

F(L,K,H,N)65PRODUCTIONANDGROWTHTheProductionFunctionIfwemWhichofthefollowingpoliciesdoyouthinkwould

bemosteffectiveatboostinggrowthandlivingstandardsinapoorcountryoverthelongrun?a. Offertaxincentivesforinvestmentbylocalfirmsb. ”””””byforeignfirmsc. Givecashpaymentsforgoodschoolattendanced. Crackdownongovtcorruptione. Restrictimportstoprotectdomesticindustriesf. Allowfreetradeg. GiveawaycondomsACTIVELEARNING1

DiscussionQuestion6666PRODUCTIONANDGROWTHWhichofthefollowingpolicieECONOMICGROWTH

ANDPUBLICPOLICYNext,welookattheways

publicpolicycanaffect

long-rungrowthinproductivity

andlivingstandards.67PRODUCTIONANDGROWTHECONOMICGROWTH

ANDPUBLICPOSavingandInvestmentWecanboostproductivitybyincreasingK,

whichrequiresinvestment.Sinceresourcesscarce,producingmorecapitalrequiresproducingfewerconsumptiongoods.Reducingconsumption=increasingsaving.

Thisextrasavingfundstheproductionofinvestmentgoods.(Moredetailsinthenextchapter.)Hence,atradeoffbetweencurrentandfutureconsumption.68PRODUCTIONANDGROWTHSavingandInvestm