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Principles of Macroeconomics Ch. 12

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Principles of Macroeconomics Ch. 12 Powered By Docstoc
					                                      Overview-7
How   economic growth differs around
 the world
Why productivity is the key
 determinant of a country’s standard of
 living
Factors that determine a country’s
 productivity
How a country’s policies influence
 growth
Principles of Macroeconomics: Ch 12                First Canadian
Edition
                     Production and Growth

A country’s standard of living depends
 on its ability to produce goods and
 services.
Within every country there are large
 changes in the standard of living over
 time.


Principles of Macroeconomics: Ch 12          First Canadian
Edition
Economic Growth Around the World
Living standards, as measured by per
 capita real GDP, vary significantly
 among nations.
The most developed countries have
 real per capita GDP that is ten to
 twenty times that of the poorest
 countries.
The process of creating a high living
 standard is keyed to productivity.
Principles of Macroeconomics: Ch 12   First Canadian
Edition
                             Real GDP per
                             Person at      Real GDP per
                             Beginning of   person at End of   Growth Rate
Country          Period      Period         Period             (per year)
Japan            1890-1990   $ 1,149        $ 22,036                3.00%
Brazil           1900-1987       595            4,664               2.39
Canada           1870-1990     1,815          23,301                2.15
West Germany     1870-1990     1,669          19,503                2.07
United States    1870-1990     3,063          24,922                1.76
China            1900-1987       547            2,386               1.71
Mexico           1900-1987       886            3,640               1.64
United Kingdom   1870-1990     3,676          18,549                1.36
Argentina        1900-1987     1,753            4,507               1.09
Indonesia        1900-1987       681            1,638               1.01
Pakistan         1900-1987       564            1,208                .88
India            1900-1987       516              904                .65
Bangladesh       1900-1987       476              512                .08
                                      Productivity
 Recall one of the Ten Principles from
   Chapter 1: A country’s standard of living
   depends on its ability to produce g & s.
 This  ability depends on productivity:
  the average quantity of g&s produced
  per unit of labour input.
 y = real GDP = quantity of output produced
  L = quantity of labour
  so we can write productivity as
  y/L (output per worker)
Principles of Macroeconomics: Ch 12                  First Canadian
Edition
                                      The Rule of 70
Annual  growth rates that seem small
   become large when compounded for
   many years.
     –   Compounding refers to the accumulation
         of a rate over a period of time.
Rule  of 70: The value of a variable will
 double in approximately
 (70 ÷ annual growth rate) years.
Grow at 7% and double in 10 years.
Principles of Macroeconomics: Ch 12                    First Canadian
Edition
                   The Rule of 70: Example

  $5,000 invested
  at 7 percent
  interest per year,
  will double in
  size in 10 years
    70 ÷ 7 = 10


Principles of Macroeconomics: Ch 12      First Canadian
Edition
                                 Assignments etc.
Assignment   1 ODD and EVEN are now
 on my web page—Due in 2nd meeting
Chapter 6 notes are up Ch 5 soon
Deferred December exam (med cert
 and other valid reasons-NOT a grade-
 raiser) Date etc to be announced in
 class soon. Late Jan or early Feb.

Principles of Macroeconomics: Ch 12                 First Canadian
Edition
                    REAL AND NOMINAL
Real removes price effects. Nominal is
 “current dollar”-current prices.
Real income (GDP)       y=Y/P>> Y=P*y
Real wages             w= W/P
Real interest          r=i-pdot
With 0 inflation P is constant, pdot=0
 and nominal = real.
 “economic                       growth”   always refers to real
Principles of Macroeconomics: Ch 12                        First Canadian
Edition
Productivity: Role and Determinants
To  understand the large differences in
 living standards we focus on how
 goods and services are produced.
Productivity refers to the quantity of
 goods and services that a worker can
 produce for each hour of work.
The inputs used to produce goods and
 services are called the factors of
 production.
Principles of Macroeconomics: Ch 12   First Canadian
Edition
       How Productivity is Determined
The            Factors of Production include:
     – Physical Capital--K
     – Human Capital
     – Natural Resources
     – Technological Knowledge
           Capital   (K) is a produced factor of
              production, i.e. capital is an input into the
              production process that in the past was an
              output from production. Eg machines.

Principles of Macroeconomics: Ch 12                 First Canadian
Edition
               The Factors of Production:
                    Physical Capital
The  stock of equipment and structures
 that are used to produce goods and
 services.
Examples:
     – Tools used to build or repair automobiles
     – Tools used to build homes or buildings
     – Buildings, e.g. Factories, offices, schools,


Principles of Macroeconomics: Ch 12       First Canadian
Edition
               The Factors of Production:
                    Human Capital
The economist’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. SKILLS

Principles of Macroeconomics: Ch 12    First Canadian
Edition
            The Factors of Production:
                Natural Resources
Inputs  used in production that are
 provided by nature, such as land,
 rivers, and mineral deposits. They are
 not necessary for an economy to be
 highly productive. Hong Kong
Renewable Resources:
          Trees,   forests
     –    Non-Renewable Resources:
          Oil,         coal, POTASH
Principles of Macroeconomics: Ch 12    First Canadian
Edition
               The Factors of Production:
               Technological Knowledge
The understanding of the best ways to
 produce goods and services.
Technological Knowledge refers to
 society’s understanding about how the
 world works.
Human Capital refers to the resources
 expended transmitting this
 understanding to the labour force.
Principles of Macroeconomics: Ch 12    First Canadian
Edition
Economic Growth and Public Policy

Public  policies, laws, traditions, and
 institutions are critical to transforming
 resources into useful output.
Governments can do many things to
 encourage or impede the attainment of
 high living standards.


Principles of Macroeconomics: Ch 12   First Canadian
Edition
Economic Growth and Public Policy
Government                           policies:
     – Encourage saving and investment
     – Encourage education and training
     – Establish secure property rights and
       political stability
     – Promote free trade policies
     – Promote research and development



Principles of Macroeconomics: Ch 12               First Canadian
Edition
         Government policies:
    Encourage saving and investment
One  way to raise future productivity is
 to invest more current resources in the
 production of capital.
Governments can encourage capital
 accumulation:
     – from domestic sources by imposing low
       taxes on interest and dividend income.
     – from foreign sources by making such
       capital secure and welcome domestically.
Principles of Macroeconomics: Ch 12    First Canadian
Edition
                      Saving and Investment
 We  can boost productivity by increasing K,
   which requires investment.
 Since  resources are scarce, producing more
   capital requires producing fewer consumption
   goods.
 Reducing   consumption = increasing saving.
   This extra saving funds the production of
   investment goods. (More details in the next
   chapter.)
 Hence,  a tradeoff between
   current and future consumption.

Principles of Macroeconomics: Ch 12           First Canadian
Edition
         Government policies:
    Encourage saving and investment
Cautions:
     – As the stock of capital rises, the extra
       output produced from an additional unit
       of capital falls (diminishing returns).
     – As the higher saving rate allows more
       capital to be accumulated, the benefits
       from additional capital become smaller
       over time, and so growth slows down.

Principles of Macroeconomics: Ch 12      First Canadian
Edition
         Government policies:
    Encourage education and training

Education  is at least as important as
 investment in physical capital.
Most countries provide basic
 education so that the work force can
 acquire the specialized skills leading
 to higher productivity.


Principles of Macroeconomics: Ch 12   First Canadian
Edition
   Government policies: Establish
  secure property rights and political
               stability
 Property   rights refer to the ability of people
  to exercise authority (ownership) 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 and safe from
  political instability and expropriation.
Principles of Macroeconomics: Ch 12      First Canadian
Edition
                        Government policies:
                        Promote Free Trade
To  exploit comparative advantage and
 maximize production and efficiency, it
 is important for countries to have the
 opportunity to sell abroad and to be
 able to purchase from lower
 opportunity cost producers.
Some countries engage in:
     – Inward-oriented trade policies-Tariffs
     – Outward-oriented trade policies
Principles of Macroeconomics: Ch 12            First Canadian
Edition
                Government policies:
              Research and Development
The   advancement of technological
 knowledge has led to higher standards
 of living. Technological advancement
 comes from private firms and public
 agencies. Positive externalities.
Government’s role is to encourage the
 research and development of new
 technologies through research grants,
 tax credits, and the patent system.
Principles of Macroeconomics: Ch 12   First Canadian
Edition
                                      Conclusion

 Living  standards, as measured by real GDP
  per capita, vary substantially from country
  to country.
 In the long run, living standards are
  determined by productivity.
 Policies that affect the determinants of
  productivity will therefore affect the next
  generation’s living standards.
 Government policies and actions can
  facilitate or impede economic growth.
Principles of Macroeconomics: Ch 12                First Canadian
Edition

				
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