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1、,9 THE REAL ECONOMY IN THE LONG RUN,25,Production and Growth,Production and Growth,A countrys standard of living depends on its ability to produce goods and services.,Production and Growth,Within a country there are large changes in the standard of living over time.,Production and Growth,In the Unit
2、ed States over the past century, average income as measured by real GDP per person has grown by about 2 percent per year.,Production and Growth,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 producti
3、vity of its workers.,Table 1 The Variety of Growth Experiences,Copyright2004 South-Western,ECONOMIC GROWTH AROUND THE WORLD,Living standards, as measured by real GDP per person, vary significantly among nations.,ECONOMIC GROWTH AROUND THE WORLD,The poorest countries have average levels of income tha
4、t 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.,PRODUCTIVITY: ITS ROLE AND DETERMINANTS,Product
5、ivity plays a key role in determining living standards for all nations in the world.,Why Productivity Is So Important,Productivity refers to the amount of goods and services that a worker can produce from each hour of work.,Why Productivity Is So Important,To understand the large differences in livi
6、ng standards across countries, we must focus on the production of goods and services.,How Productivity Is Determined,The inputs used to produce goods and services are called the factors of production. The factors of production directly determine productivity.,How Productivity Is Determined,The Facto
7、rs of Production Physical capital Human capital Natural resources Technological knowledge,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. is the stock of equipme
8、nt 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.,How Productivity Is Determined,Human Capital the economists term for the knowledge and skills that workers acquire through educatio
9、n, training, and experience Like physical capital, human capital raises a nations ability to produce goods and services.,How Productivity Is Determined,Natural Resources inputs used in production that are provided by nature, such as land, rivers, and mineral deposits. Renewable resources include tre
10、es 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.,How Productivity Is Determined,Technological Knowledge societys understanding of the best ways to produce goods and servic
11、es. Human capital refers to the resources expended transmitting this understanding to the labor force.,FYI: The Production Function,Economists often use a production function to describe the relationship between the quantity of inputs used in production and the quantity of output from production.,FY
12、I: 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.,FYI: The Product
13、ion Function,A production function has constant returns to scale if, for any positive number x, xY = A F(xL, xK, xH, xN) That is, a doubling of all inputs causes the amount of output to double as well.,FYI: The Production Function,Production functions with constant returns to scale have an interesti
14、ng implication. Setting x = 1/L, Y/ L = A F(1, K/ L, H/ L, N/ L) Where: Y/L = output per worker K/L = physical capital per worker H/L = human capital per worker N/L = natural resources per worker,FYI: The Production Function,The preceding equation says that productivity (Y/L) depends on physical cap
15、ital per worker (K/L), human capital per worker (H/L), and natural resources per worker (N/L), as well as the state of technology, (A).,ECONOMIC GROWTH AND PUBLIC POLICY,Governments can do many things to raise productivity and living standards.,ECONOMIC GROWTH AND PUBLIC POLICY,Government Policies T
16、hat 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.,The Importance of Saving and Invest
17、ment,One way to raise future productivity is to invest more current resources in the production of capital.,Figure 1 Growth and Investment,Copyright2003 Southwestern/Thomson Learning,(,a,),G,r,o,w,t,h,R,a,t,e,1,9,6,0,1991,(,b,),I,n,v,e,s,t,m,e,n,t,1,9,6,0,1991,South Korea,Singapore,Japan,Israel,Cana
18、da,Brazil,West Germany,Mexico,United Kingdom,Nigeria,United States,India,Bangladesh,Chile,Rwanda,South Korea,Singapore,Japan,Israel,Canada,Brazil,West Germany,Mexico,United Kingdom,Nigeria,United States,India,Bangladesh,Chile,Rwanda,Investment (percent of GDP),Growth Rate (percent),0,1,2,3,4,5,6,7,0
19、,10,20,30,40,Diminishing Returns and the Catch-Up Effect,As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns. Because of diminishing returns, an increase in the saving rate leads to higher growth only for a wh
20、ile.,Diminishing Returns and the Catch-Up Effect,In the long run, the higher saving rate leads to a higher level of productivity and income, but not to higher growth in these areas.,Diminishing Returns and the Catch-Up Effect,The catch-up effect refers to the property whereby countries that start of
21、f poor tend to grow more rapidly than countries that start off rich.,Investment from Abroad,Governments can increase capital accumulation and long-term economic growth by encouraging investment from foreign sources.,Investment from Abroad,Investment from abroad takes several forms: Foreign Direct In
22、vestment Capital investment owned and operated by a foreign entity. Foreign Portfolio Investment Investments financed with foreign money but operated by domestic residents.,Education,For a countrys long-run growth, education is at least as important as investment in physical capital. In the United S
23、tates, each year of schooling raises a persons wage, on average, by about 10 percent. Thus, one way the government can enhance the standard of living is to provide schools and encourage the population to take advantage of them.,Education,An educated person might generate new ideas about how best to
24、produce goods and services, which in turn, might enter societys pool of knowledge and provide an external benefit to others.,Education,One problem facing some poor countries is the brain drainthe emigration of many of the most highly educated workers to rich countries.,Property Rights and Political
25、Stability,Property rights refer to the ability of people to exercise authority over the resources they own. An economy-wide respect for property rights is an important prerequisite for the price system to work. It is necessary for investors to feel that their investments are secure.,Free Trade,Trade
26、 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.,Free Trade,Some countries engage in . . . . . . inward-orientated trade policies, avoiding interaction with oth
27、er countries. . . . outward-orientated trade policies, encouraging interaction with other countries.,Research and Development,The advance of technological knowledge has led to higher standards of living. Most technological advance comes from private research by firms and individual inventors. Govern
28、ment can encourage the development of new technologies through research grants, tax breaks, and the patent system.,CASE STUDY: The Productivity Slowdown and Speedup,From 1959 to 1973 productivity grew at a rate of 3.2 percent per year. From 1973 to 1995 productivity grew by only 1.5 percent per year
29、. Productivity accelerated again in 1995, growing by 2.6 percent per year on average during the next six years.,CASE STUDY: The Productivity Slowdown and Speedup,The causes of the changes in productivity growth are elusive. The slowdown cannot be traced to the factors of production that are most eas
30、ily measured. Many economists attribute the slowdown and speedup in economic growth to changes in technology and the creation of new ideas.,Figure 2 The Growth in Real GDP Per Person,Copyright2003 Southwestern/Thomson Learning,Growth Rate,(percent,per year),1.0,1.5,2.0,2.5,3.0,3.5,4.0,1,8,7,0,1890,1,8,9,0,1910,1,9,1,0,1930,1,9,3,0,1950,1,9,5,0,1970,1,9,7,0,1990,1,9,9,0,2000,0,Population Growth,Economists and other social scientists have long debated how population growth affects a soc
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