Chapter 7 Notes

Chapter 7 Notes - -String, clear property rights require...

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Chapter 7 Notes Importance of productivity – output/hour/worker Productive process requires inputs – factors of production 1) Physical capital 2) Human capital 3) Natural resources 4) Technological knowledge (But “technology” doesn’t just mean computer- related stuff. Technology refers to the knowledge that allows producers to transform inputs into output, can be freely shared among all workers) The relationship between inputs and outputs is summarized by the production function Y = F (K, L) - Assume technological knowledge exists - Assume this production function has the property of constant returns to scale Meaning: If you change ALL inputs by any positive constant, then output will change by the same constant Let z>0, then zY = F (zK, zL) Let Z= 1/L, then, Y/L = F (K/L, L/L) Rename: y = f (k) Meaning: productivity or output/worker(y) depends on capital/worker (k) Property designates ownership . Ownership allows the owner to use or not use the property as he sees fit, to exclude others from using it, or to transfer ownership.
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Unformatted text preview: -String, clear property rights require enforcing contracts, fostering political stability-Prices are an incentive. Why create something in demand if you cannot reap the rewards?-No foreign investment without string property rights What can the government do to enhance productivity? 1. Encourage saving and investment. Q: Will saving more increase productivity and our standard of living? A: Due to diminishing returns, more saving and more investment in capital goods increases economic growth only for a while. To demonstrate the idea of diminishing returns; as we add more and more capital to the productive process, holding constant all other determinants of output , then output increases at a diminished rate relative to increasing only one input. 2. Investment from abroad. Foreign direct/portfolio 3. Education 4. Property rights and political stability 5. Free trade Inward/outward-oriented policies 6. Research and development Issues around population growth/ natural resources...
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Chapter 7 Notes - -String, clear property rights require...

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