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Macro%20Chapter%207

Macro%20Chapter%207 - CHAPTER 7 CHAPTER Production and...

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CHAPTER 7 CHAPTER 7 Production and Growth Production and Growth
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Main Questions: What are the facts about living standards and growth rates around the world? Why does productivity matter for living standards? What determines productivity and its growth rate? How can public policy affect growth and living standards?
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Production and Growth A country’s standard of living depends on its ability to produce goods and services. Within a country there are large changes in the standard of living over time. In Canada over the past century, average income as measured by real GDP per person has grown by about 2 percent per year.
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UK Mexico Mali Real GDP per Capita $30,800 $9,800 $1,000 Life Expectancy 78 yrs 74 yrs 41 yrs Adult Literacy 99% 92% 46%
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Incomes and Growth Around the World Living standards, as measured by real GDP per person, vary significantly among nations. The poorest countries have average levels of income that have not been seen in the developed world for many decades. Annual growth rates that seem small become large when compounded for many years. Compounding refers to the accumulation of a growth rate over a period of time.
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The Variety of Growth Experiences
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Incomes and Growth Around the World Questions: Why are some countries richer than others? Why do some countries grow quickly while others seem stuck in a poverty trap? What policies may help raise growth rates and long-run living standards?
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Productivity Recall: A country’s standard of living depends on its ability to produce goods and services. This ability depends on productivity : the average quantity of goods &services produced per unit of labour input. Y = real GDP = quantity of output produced L = quantity of labour Therefore productivity = Y / L (output per worker)
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How Productivity Is Determined Factors of production directly determine productivity. The Factors of Production Physical capital per worker Human capital per worker Natural resources per worker Technological knowledge per worker
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Physical Capital Per Worker Physical capital : The stock of equipment and structures used to produce goods & services, denoted K . K / L = capital per worker. Productivity is higher when the average worker has more capital i.e. , an increase in K / L causes an increase in Y / L .
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Human Capital Per Worker Human capital ( H ): the knowledge and skills workers acquire through education, training, and experience H / L = the average worker’s human capital Productivity is higher when the average worker has more human capital (education, skills, etc.). i.e. , an increase in H / L causes an increase in Y / L .
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Natural Resources Per Worker Natural resources ( N ): the inputs into production that nature provides, e.g., land, mineral deposits Other things equal, more N allows a country to produce more Y .
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