Ch007 - Chapter 7 Economic Growth Productivity and Living...

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Chapter 7 Economic Growth, Productivity, and Living Standards Overview This chapter explores the sources of economic growth and rising living standards in the modern world. It looks at economic growth in industrialized countries (measured by real GDP per person) since the mid-nineteenth century. The chapter focuses on the continuing increase in average labor productivity as the key to rising living standards. It analyzes each of the factors that lead to increased productivity and discusses their implications for government policies to promote growth. The costs of growth are also discussed, as is the question of whether there may be limits to the amount of economic growth a society can achieve. Core Principles Cost-Benefit Principle - the decision to invest in human capital, like other investment decisions, is affected by opportunity cost. In the example in the text, a secretary should learn word processing skills (i.e., invest in human capital) if the benefits exceed the costs, including opportunity costs. Principle of Increasing Opportunity Cost – the allocation of capital between two workers is examined using this principle, and it is also employed to explain diminishing returns to capital. Principle of Comparative Advantage - the principle is used in the section on technology. The authors explain that technology can improve productivity in industries other than the ones in which they are introduced. The examples of shipping and refrigerated transport are used to show how technology affects how producers will determine what to produce. Overall productivity increases when producers concentrate on those activities at which they are relatively most efficient. Equilibrium Principle - this principle is used in explaining why communism failed. A market in equilibrium leaves individuals with no unexploited opportunities, an efficiency that could not be replicated by the central planners in communist countries. Scarcity Principle - the principle is used to illustrate a cost of economic growth; a higher standard of living tomorrow must be purchased at the cost of sacrificing current consumption. 77
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Cost-Benefit Principle – because achieving higher economic growth imposes real economic costs, the principle tells us that higher growth should be pursued only if the benefits outweigh the costs. Equilibrium Principle - this principle is used again, this time in connection with environmental quality also as an instance of what happens when it is not allowed to work. The authors point out the need for government intervention because environmental quality is not bought and sold in markets and thus will not automatically reach its optimal level through market processes. Scarcity Principle
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This note was uploaded on 04/15/2008 for the course ECO 181 taught by Professor Cherry during the Spring '07 term at SUNY Buffalo.

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Ch007 - Chapter 7 Economic Growth Productivity and Living...

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