ECON Lecture III

ECON Lecture III - Long Run Productivity Productivity (of...

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Long Run Productivity Productivity (of labor – one definition): the amount of g/s produced from each hour of a worker’s time. I. Basic factors determining productivity A. Physical Capital – manufactured aids to future production of g/s. B. Human Capital – worker’s knowledge and skills (acquired through education, training and experience). C. Natural Resources – land, forests, minerals, water, etc. 1. Renewable 2. Non-renewable D. Technology II. No single factor is essential for an economy to prosper. Examples: 1. Early U.S. – little physical capital, but grew rapidly. 2. Kuwait – little human capital. 3. Japan, Singapore, Switzerland – few natural resources. 4. China (last 20 years) -- relatively lacking in technology. III. Government Nominal GDP growth 2004-2005: China = 9.9% Canada = 2.9% Russia = 6.4% Sweden = 2.7% Rwanda = 5.0% France = 1.5% Ireland = 4.7% Belgium = 1.2% U.S. = 3.5% Germany = 0.9% A. Savings and Investment – increase physical capital 1. The government can attempt to promote S and I by giving tax credits for capital projects and tax breaks on investment returns. 2. Foreign direct investment (FDI) – performed by MNEs. FDI results in direct funds for the increase of physical capital (e.g. Pepsi plant in Russia; Honda plant in Ohio). a. increases productivity and GDP per capita in recipient country b. raises wages and creates training in recipient nation 3. Foreign portfolio investment (FPI) – purchases of foreign assets, which indirectly results in funds for the increase of physical capital (e.g. buying stocks or bonds of foreign corporations). a. increases productivity and GDP per capita in recipient country b. reduces risk for source country 4. Issues a. opportunity costs – increased investment takes resources from other areas b. diminishing returns on investment – as the capital stock increases, the extra output from an additional unit of capital falls. → The catch-up effect: relatively poor countries (with little capital), can grow more quickly than countries with already large capital stocks.
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B. Education and Training – increase human capital Education yields positive externalities (effects on 3 rd parties not directly involved in the buying or selling of a g/s). → more resources should be spent on education than will be privately provided. The government can increase education and training by publicly providing them (e.g. public school system), or by providing subsidies or tax breaks (e.g. grants and subsidized loans). 1. Issues a. opportunity costs – increased investment in human capital takes resources from other areas b. diminishing returns on human capital – as the human capital stock increases, the extra output from an additional unit of human capital falls. C.
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ECON Lecture III - Long Run Productivity Productivity (of...

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