Why do some countries grow faster while others seem stuck in a poverty trap

Why do some countries grow faster while others seem

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Why do some countries grow faster while others seem stuck in a poverty trap? What policies may help raise growth rates and long-run living standards? Incomes and Growth Around the World ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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40 Productivity and its determinants ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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41 Productivity A country’s standard of living depends on its ability to produce g&s. W This ability depends on productivity , the average quantity of g&s produced per unit of labor input. Productivity = Y/L ( output per worker ) Y = real GDP = quantity of output produced L = quantity of labor When a nation’s workers are productive, real GDP is large & incomes are high. W When productivity grows rapidly, living standards will rise. Q: What determines productivity and its growth rate? ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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42 A Simple, Labour-Only Model of Production Figure illustrates the production function with labor but no capital inputs Notice the slope, “the rise over the run,” changes as you move along the curve … as labour increases you see lower returns to output; that’s “ diminishing returns to labour, ” it increases but at a decreasing rate ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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43 A More Elaborate Model of Production with Labour and Capital Now we have a more complicated production function that has labor and capital as inputs. Notice we still have the same axes, so when you add capital, for a given amount of labor, you see increasing output, but output increases at a decreasing rate; that’s “diminishing returns to capital” ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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44 How Productivity Is Determined The inputs used to produce goods and services are called the factors of production. The factors of production include: W [ physical ] capital , K : The stock of equipment and machines used to produce g&s. W Human capital ( H ): the knowledge & skills workers acquire through education, training & experience W Natural resources ( N ): eg. land, mineral deposits. Some countries are rich because they have abundant natural resources ( e.g., Saudi Arabia has abundance of oil). But countries need not have much N to be rich ( e.g., Singapore imports the N it needs). W Technological knowledge : refers to society’s understanding of how to produce g&s. Technological progress means any advance in knowledge that boosts productivity The factors of production directly determine productivity. ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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45 The Production Function ECW1102, Semester 1, 2017 MUM/ Dr. Shahriar Kabir
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46 The Production Function The production function is an equation showing the relation between output & inputs: Y = A F ( L , K , H , N ) F ( ) a function that shows how inputs are combined to produce output A ” – the level of technology A ” multiplies the function F ( ), means improvements in technology ( in “ A ”) allow more output ( Y ) to be produced from any given combination of inputs.
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