Chapter 12.docx

Chapter 12 Production and Growth -This chapter focuses on the long-run determinants of the level and growth of real GDP -Productivity: the amount of goods and services produced for each hour of a worker?s time ECONOMIC GROWTH AROUND THE WORLD -Because of differences in growth rates, the ranking of countries by income changes substantially over time -The world?s richest countries have no guarantee they will stay the richest and the world?s poorest countries are not doomed forever to remain in poverty PRODUCTIVITY: ITS ROLE AND DETERMINANTS -Growth in productivity is the key determinant of growth in living standards -Physical Capital: the stock of equipment and structures that are used to produce goods and services (workers are more productive if they have tools with which to work) -Capital is a factor of production used to produce all kinds of goods and services, including more capital -Human capital: the knowledge and skills that workers acquire through education, training, and experience -Natural resources: the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits -Renewable: trees in a forest -Nonrenewable: oil -Technological knowledge: society?s understanding of the best ways to produce goods and services -Common knowledge: Henry Ford?s assembly line -Proprietary knowledge: coca-cola recipe -Temporarily proprietary knowledge: patents on drugs *Knowledge is the quality of society?s textbooks; human capital is the amount of time that the population has devoted to reading them -If the population continues to increase, won?t we run out of resources and the standard of living will fall? -Technological progress has made once crucial resources less necessary ECONOMIC GROWTH AND PUBLIC POLICY -One way to raise future productivity is to invest more current resources in the production of capital -Encouraging saving and investment is one way that a government can encourage growth and, in the long run, raise the economy?s standard of living -Diminishing returns: the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases -When workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their production only slightly -Catch-up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich -Investment by foreigners also increases economic growth -Foreign direct investment: a capital investment that is owned and operated by a foreign entity -Foreign portfolio investment: an investment that is financed with foreign money but operated by domestic residents -Even though some of the benefits from this investment flow back to the foreign owners, this investment does increase the economy?s stock of capital, leading to higher productivity and higher wages -Investments from abroad is one way for poor countries to learn the state-of-the-art technologies developed and used in richer countries -World Bank and International Monetary Fund were established to promote economic prosperity around the world after WW2 because economic distress often leads to political turmoil, international tensions, and military conflict -Government policy can enhance the standard of living by providing good schools and encouraging the population to take advantage of them -Brain drain: the emigration of many of the most highly educated workers to rich countries -The right investments in the health of the population provide one way for a nation to increase productivity and raise living standards -Height increase indicate economic growth (taller workers are more productive) -Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth -Protecting property rights and promoting political stability is another way policymakers foster economic growth -A country with an efficient court system, honest government officials, and stable constitution will enjoy a higher economic standard of living than a country with a poor court system, corrupt officials, and frequent revolutions and coups -Inward-oriented policies: increasing productivity and living standards within a country by avoiding interaction with the rest of the world -Outward-oriented policies: international trade -International trade can improve the economic well being of a country?s citizens -Geography also influences economic growth, as countries with easy access to the world?s waterways tend to be far more prosperous than landlocked countries (Africa) -The primary reason that living standards are higher today than they were a century ago is that technological knowledge has advanced -Public goods: Once one person discovers an idea, the idea enters society?s pool of knowledge, and other people can freely use it -US government encourages technological development through government funded research entities (NASA) and patent systems -A large population means more workers to produce goods and services (China), but this means that there are more people to consume these goods and services -Thomas Malthus, an English minister and early economic thinker of the 17th and 18th century thought that the world?s resources would not be able to support population growth -However, he was proven wrong, as growth in human ingenuity has offset the effects of a larger population -Rapid population growth makes it harder to provide workers with the tools and skills they need to achieve high levels of productivity (Africa) -China has implemented the one child per family law, while other countries have increased awareness of birth control techniques -Economist Michael Kremer believes that the greater the population, the more the technological advancement