II.
A.A.
Economic Growth around the World
CHAPTER 7: Production and GrowthWhich country has the largest growth rates on average? What is the effect of compounding on the process of economic growth? Apply the rule of 70.
Table 1 shows data on real GDP per capita in 1960 and 2007 among different countries.
Definition of productivity: the amount of goods and services produced for each hour of a worker’s time.
Productivity: Its Role and Determinants
2.
What does the data tell us about the living standards between these countries?Review of Principle #8: A Country’s Standard of Living Depends on Its Ability to
Produce Goods and Services.
Because of different growth rates, the ranking of countries by income per person changes substantially over time. Are poor countries doomed to poverty forever?
1.
3.
2.
1.
Why Productivity Is So Important?
B.How Productivity Is Determined1.
Physical Capital per Worker
Definition of physical capital: the stock of equipment and structures that are used to produce goods and services.
2.
Human Capital per Worker
Definition of human capital: the knowledge and skills that workers acquire through education, training, and experience.
3.
Natural Resources per Workera.
Definition of natural resources: the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits.
Are Natural Resources a Limit to Growth?
b.
4.
Technological Knowledge
Definition of technological knowledge: society’s understanding of the best ways to produce goods and services.
C.
The Production Function1.2.
A production function describes the relationship between the quantity of inputs used in production and the quantity of output from production.The production function generally is written like this:
Y = A F(L, K, H, N)
where Y = output, L = quantity of labour, K = quantity of physical capital, H = quantity of human capital, N = quantity of natural resources, A reflects the
available production technology, and F( ) is a function that shows how inputs are combined to produce output.
3.Constant returns to scalea.b.
This property implies that as all inputs are doubled, output will exactly double.
This implies that the following must be true:
x Y = A F(xL, xK, xH, xN)
c.
d.
Y/L = A F(1, K/L, H/L, N/L)
This chapter discusses how employment has declined relative to output in the farm sector. Can you think of another sector of the economy where the same phenomenon has occurred more recently? Would you consider the change in employment a success or failure from the standpoint of society as a whole?
Where x =2 if inputs are doubled. What about only if labour is doubled? Would output double as well?
This shows that output per worker depends on the amount of physical capital per worker (K/L), the amount of human capital per worker (H/L), and the amount of natural resources per worker (N/L).
This also means that if we want to examine output per worker, we could set x = 1/L and we would get the following:
III.Economic Growth and Public PolicyA.
The Importance of Saving and Investment1.2.3.
Investment is funded by saving. How do we increase saving today? What is an opportunity cost of producing more capital goods?
Figure 7.1 shows how the amount of capital per worker influences the amount of output per worker. The curve becomes flatter as the amount of capital increases and why?
B.Diminishing Returns and the Catch-Up Effect1.2.
Definition of diminishing returns: the property whereby the benefit from
an extra unit of an input declines as the quantity of the input increases.An important implication of diminishing returns is the Catch-Up Effect.a.
Definition of catch-up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.
A puzzle: The share of GDP devoted to investment was similar for
Canada and South Korea (about 23%) over the past 40 years. However, South Korea had a 6 percent growth rate of average annual income, while Canada had only a 2 percent growth rate over that past 40 years. How can this be explained?
b.
E.
3.2.1.Education
a.
Investment from Abroad
b.
C.
D.
2.
1.
Property Rights and Political Stability
Investment in the country by foreigners can also occur.
What is the opportunity cost of investing in human capital?
Foreign portfolio investment occurs when a capital investment is financed with foreign money but operated by domestic residents.Foreign direct investment occurs when a capital investment is owned and operated by a foreign entity.
Saving by domestic residents is not the only way for a country to invest in new
capital.
What is a “brain drain”? Many poor countries and rich countries as well face a brain drain and why?
Some of the benefits of foreign investment flow back to foreign owners in the form of profits. How does foreign investment benefit our economy?
F.
2.
2.
1.
1.
Free Trade
There is little incentive to produce products if there is no guarantee that they cannot be taken.
Trade allows a country to specialize in what it does best and thus consume beyond its production possibilities.
Most countries including Canada import substantial amount of goods and services from other countries. Yet this chapter says that a nation can enjoy a higher standard of living only if it can produce a large quantity of goods and services. Can you reconcile these two facts?
Countries with questionable enforcement of property rights or an unstable political climate will also have difficulty in attracting foreign (or even domestic) investment.
G.Research and Development1.2.
The primary reason why living standards have improved over time has been due to large increases in technological knowledge.
The Canadian government promotes the creation of new technological
information by providing research grants and providing tax incentives for firms engaged in research.
The patent system also encourages research by granting an inventor the exclusive right to produce the product for a specified number of years.
3.
H.Population Growth1.
Stretching Natural Resources
a.2oo years ago, Thomas Malthus (an English minister and early economic
thinker) argued that an ever-increasing population meant that the world was doomed to live in poverty forever. Was he right?b.Many critics argue that population growth is depleting the Earth’s
nonrenewable resources and, therefore, places a limit on the growth in living standards. But technological progress often yields ways to avoid these limits. For example, the invention of hybrid cars reduces the use of gas, or better insulating homes reduces the energy required to heat or cool them. The scarcer a resource is, the higher the market price which provides incentive to conserve it and develop alternatives.
2.Diluting the Capital Stocka.b.
High population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly.Countries with a high population growth have large numbers of school-age children, placing a burden on the education system.
Some countries have already instituted measures to reduce population growth rates, for example, regulating the number of children (e.g., China) and fostering equal treatment for women which raises economic
opportunities for women leading to lower rates of population (e.g., India).
c.
3.Promoting Technological Progressa.
Some economists have suggested that population growth has driven technological progress and economic prosperity.
More people implies more scientists, more inventors, and more engineers.
b.
G.
Question
The catch-up effect says that countries with low income can grow faster than countries with higher income. However, in statistical studies that include many diverse countries we do not observe the catch-up-effect unless we control for other variables that affect productivity. Considering the determinants of
productivity, list and explain some things that would tend to prohibit or limit a poor country's ability to catch up with the rich ones.
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