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Chapter 7 scanned - Chapter 7-Long-Run'Economic...

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Unformatted text preview: Chapter 7 -Long-Run'Economic Growth (Sustained upward trend in aggregate output over several decades.) Motivation: E E I I i i E . E . , . 1 family with all their possessions ' in ,th UrKu ,1 ywnr-BJ e ' ‘” E S E E GDP? per capita: E Life expectancy: Adult iiteracy: ' } E E I E E i E Life expeé afi' y. E Aduit iiteracy: E E ( , e ‘ C C “ E a Q 0 Av we $‘ “w. . ’ o " .. c - ‘- _ . — ' - v A . A ' 005 1960-2005 aiti Productivity I Recall one of the Ten Principles from Chap. 1: A country’s standard of living depends on its ability to I This ability depends on , the average quantity of g&s produced per unit of labor input. I Y = real GDP = quantity of output produced L = quantity of labor so productivity = Y/L (output per worker) PRODUCTION AND GROWTH 9 The Production Function I The production function is a graph or equation showing the relation between output and inputs: Y = AF(L, K, H, N) F( ) — a function that shows how inputs are combined to produce output “A” — the level of technology I “A” multiplies the function F( ), so improvements in technology (increases in “A”) allow more output (Y) to be produced from any given combination of inputs. PRODUCTION AND GROWTH 16 0 Since changes in labor generally move with changes in population we often just look at change in productivity where productivity is just output per workers 0 To examine what factors affect Productivity just divide everything by L. Productivity is a function of... Y/L = AF(1, K/L, H/L, N/L) ' This equation shows that productivity (output per worker) depends on: ' the level of technology (A) ' physical capital per worker ' human capital per worker ' natural resources per worker PRODUCTION AND GROWTH 18 K/L - per Worker ' Recall: The stock of used to produce g&s is called [physical] capital, denoted K. ' K/L = capital per worker.‘ ' Productivity is higher when the average worker has more capital (machines, equipment, etc.). ' i.e., an increase in K/L causes an increase in Y/L. PRODUCTION AND GROWTH 11 ' H/L - Per Worker ' Human capital (H): the 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. PRODUCTION AND GROWTH N/L - 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. ln per-worker terms, an increase in N/L causes an increase in Y/L. I Some countries are rich because they have abundant natural resources (e.g., Saudi Arabia has lots of oil). ' But countries need not have much N to be rich (e.g., Japan imports the N it needs). PRODUCTION AND GROWTH 12 13 Technological Knowledge ' Technological knowledge: society’s understanding of the best ways to produce g&s ' Technological progress does not only mean a faster computer, a higher-definition TV, or a smaller cell phone. ' it means any advance in knowledge that boosts productivity (allows society to get more output from its resources). ' E.g., Henry Ford and the assembly line. PRODUCTION AND GROWTH 14 Tech. Knowledge vs. Human Capital " Technological knowledge refers to “society’s of how to produce g&s. ' Human capital results from the effort people expend to this knowledge. ' Both are important for productivity. PRODUCTION AND GROWTH 15 ACTIVE LEARNING 1 Dlscussanuestlon.. Which of the following policies do you think would be most effective at boosting growth and living standards in a poor country over the long run? a. Offer tax incentives for investment by local firms ” " ” ” ” by foreign firms . Give cash payments for good school attendance . Crack down on g0vt corruption . Restrict imports to protect domestic industries Allow free trade corhmaog . Give away condoms 19 r -i i i .5 f l i l i i l l , 'l l l i l l l , l i j Saving and Investment ' We can boost productivity by increasing K, which requires ' Since resources are scarce, producing more capital requires producing fewer ' Reducing consumption = increasing This extra saving funds the production of goods. (More details in the next chapter.) I Hence, a between current and future consumption. PRODUCTION AND GROWTH 21 What happens to output as Capital (K) increases? I The govt can implement policies that raise saving and investment. (Details in next chapter.) Then K will , causing productivity and living standards to ' But this faster growth is temporary, due to returns to capital: As K rises, the extra output from an additional unit of K . ' PRODUCTION AND GROWTH 22 E l E ,2 | E | ! i | i i E '| El 2 i i | | ‘5 i 2 l | l 2 i I | 2 J 2 | The Production Function 8: Diminishing Returns 2|f workers , ’V have little K, E 2giving them more , increases their 2product' 't fworkersalready‘fi 2have.a}_|otj-of K,‘ 2givingithemfmore 2i‘ncrease's; ' f ' m..- _apita| per worker PRODUCTION AND GROWTH 23 The catch-up effect: the property whereby poor countries tend to rapid|y than rich ones Y/L ..... ...... E .................. ; ........... E _____ ’ country s growth: count 2/ ry starts here PRODUCTION AND GROWTH Example of the Catch-Up Effect I Over 1960—1990, the US. and S. Korea devoted a similar share of GDP to investment, so you might expect they would have similar growth performance. I But growth was >6% in Korea and only 2% in the US. I Explanation: the catch-up effect. In 1960, K/L was far smaller in Korea than in the U.S., hence Korea grew faster. PRODUCTION AND GROWTH 25 Investment from Abroad I To raise K/L and hence productivity, wages, and living standards, the govt can also encourage I foreign direct investment: a capital investment (e.g., factory) that is owned & operated by a I foreign portfolio investment: a capital investment financed with foreign money but operated by i .l l l l l i l l l 1 l l g E I Some of the returns from these investments flow back to the foreign countries that supplied l the funds. PRODUCTION AND GROWTH 26 I Especially beneficial in poor countries that cannot generate enough saving to fund investment projects themselves. I Also helps poor countries learn state-of-the-art technologies developed in other countries. Education ' Govt can increase productivity by promoting education—investment in human capital (H). ' Examples: ' Education has significant effects: In the US, each year of schooling raises a worker’s wage by 10%. I But investing in H also involves a tradeoff between the present & future: Spending a year in school requires sacrificing a year’s wages now to have higher wages later. PRODUCTION AND GROWTH Health and Nutrition " Health care expenditure is a type of investment in — healthier workers are more productive. " In countries with significant malnourishment, raising workers’ caloric intake raises productivity: ' Over 1962-95, caloric consumption rose 44% in S. Korea, and economic growth was spectacular. ' Nobel winner Robert Fogel: 30% of Great Britain’s growth from 1790-1980 was due to improved nutrition. PRODUCTION AND GROWTH 28 29 Property Rights and Political Stability I Recall: Markets are usually a good way to organize economic activity. The price system allocates resources to their most efficient uses. I This requires respect for property rights, the ability of people to exercise authority over the resources they own. PRODUCTION AND GROWTH 30 Property Rights and Pelitical Stability I ln many poor countries, the justice system doesn’t work very well: ' I Contracts aren’t always enforced I Fraud, corruption often go unpunished I ln some, firms must bribe govt officials for permits I Political instability (e.g., frequent coups) creates uncertainty over whether property rights will be protected in the future. PRODUCTION AND GROWTH . 31 Free Trade I Inward-oriented policies (6.9., -on investment from abroad) aim to raise living standards by avoiding interaction with other countries. ' Outward-oriented policies (9.9., the of restrictions on trade or foreign investment) promote integration with the world economy. PRODUCTION AND GROWTH 33 Research and Development " is the main reason why living standards rise over the long run. I One reason is that knowledge is a public good: Ideas can be , increasing the productivity of ' Policies to promote tech. progress: ‘-'1. '2. '3. PRODUCTION AND GROWTH 35 ...__4__#fi.__:wm._w-_.mwvA'fl...;%_.;._.w'_m_t;__e_v.w~.__flw... Population Growth may affect living standards in 3 different ways: 1. Stretching natural resources I 200 years ago, Malthus argued that pop. growth would strain society’s ability to provide for itself. I Since then, the world population has increased sixfold. lf Malthus was right, living standards would have fallen. instead, they’ve risen. I Malthus failed to account for technological progress and productivity growth. ' PRODUCTION AND GROWTH 36 Population Growth 2. Diluting the capital stock I Bigger population = L = K/L = lower productivity & living standards. I This applies to H as well as K: fast pop. growth = more children = greater on educational system. I Countries with fast pop. growth tend to have lower educational attainment. PRODUCTION AND GROWTH 37 What can be done? 1. 2. Population Growth 3. Promoting tech. progress ‘ I More people = more = more discoveries = tech. progress & economic growth I Evidence from Michael Kremer: Over the course of human history, I growth rates as the world’s population increased I more populated regions grew faster than less populated ones PRODUCTION AND GROWTH 39 ACTIVE LEARNING 2 R " Wproductmconcepts .............................................................................. I List the determinants of productivity. I List three policies that attempt to raise living standards by increasing one of the determinants of productivity. '40 Are Natural Resources at Limit to Growth? ' Some argue that population growth is the Earth’s non-renewable resources, and thus will growth in living standards. ' But often yields ways to avoid these limits: I Hybrid cars use less gas. " Better insulation in homes reduces the energy required to heat or cool them. ' As a resource becomes scarcer, its market price , which the incentive to conserve it and develop PRODUCTION AND GROWTH 43 ...
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