Chapter 25
Production and
Growth
College of BusinessAlfaisal
UNIVERSITY
Saudi Arabia Energy
FutureToday
Production
Consumption
Selling
Buying
2030?
U.S. Energy
FutureToday
Consumption
Production
Buying
Selling
2030?
Subsidize Petrol?
Quantity
Price
Demand
Supply - Market
Qm
PmSupply - Subsidize
Qs
Ps
Too much and
too cheap
Profit attracts Innovation
Time
$ Innovation drops cost
allowing price to also drop
Price
Innovation
Innovation
Innovation
Innovation
Cost
Intellectual
Financial Physical
Human
Culture
Entrepreneur
trust knowledge skills personality health relationships
natural resources time buildings equipmentthings than make things
money and risksavers and borrowers time is money
(1+r)n
insurance limited liability corporations
ideas technologymethods
Productivity
Outputdivided by
Input
How do we go from this...
to this?
1800 2010 Change
Population one billion seven billion 7x
Life Expectancy 26 years 66 years 40 +
GDP Per Capita Per Day $3 $30 10 x
GDP: $70,000,000,000,000 Population: 7,000,000,000GDP Per Capita: $10,000
GDP Per Capita
Source: https://www.google.com.sa/publicdata/explore?
ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=world%20gdp#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=region&ifdim=regi
on&tdim=true&hl=en_US&dl=en&ind=false
Rates and
Compounding Linear versus
Exponential
0
8
16
24
32
40
48
56
64
1 2 3 4 5 62
48
16
32
64
24
68
1012
Linear versus ExponentialAdding versus Compounding
+
^
Rule of 70sYears to Double
70Rate of Growth
70 divided by
the rate of growth
1%2%
3%
4%
5%
RateYears to Double
70 ÷ 1 = 7070 ÷ 2 = 35
70 ÷ 3 = 23.3
70 ÷ 4 = 17.5
70 ÷ 5 = 14
Size in 70 years?
2 x4 x
8 x
16 x
32 x
One word
Productivity
Why do Standards of Living
differ?
Better at making stuff
Productivity
What people want
What is Wealth?
Anything that helps you create wealth
What is Capital?
Cultural Human Physical
Intellectual Financial
Five Types of Capital
Worldview
Political
Legal
Economic
How people view and treat other
people
Expectations
Cultural Capital
Property RightsRule of Law
Political Stability No peace ... No prosperity
Cultural Capital
LadyJustice
Weight of the evidenceversus
Status of the parties
I look for three things in hiring people.
The first is personal integrity, the second is
intelligence, and the third is a high energy level.
But of you don’t have the first, the other two will kill
you.
- Warren Buffett, CEO, Berkshire Hathaway
Integrity Competence
Trust
Trust Knowledge and Skills Health and Nutrition Social Relationships
Human Capital
Health & Nutrition
Two types Tools
Natural Resources Water, Oil, Minerals
Physical Capital
Tools we use to make stuff
Natural Resources Renewable
Non-renewable
Physical Capital
Technology How the world works
How we make smart things and make
things smart
Intellectual Capital
Research and Development
Patent System
20 Year Monopoly on your idea
Human CapitalIntellectual Capital
Money
Allows us to store labor and shift time
Financial Capital
Savingsversus
Consumption
Spend or Save?
Save instead of consumeInvestment in new capital
Increase productivity
Three Steps
Capital Allocation
Right capital at the right time
Innovation - Productivity
Continuous Innovation
Each year in school adds 10 percent to
income
Invest versus consume
Education
More peopleSmaller slices
Grow the pie faster than population
GDPGDP
per capita
Population Growth
Population Growth
A smaller slice of a larger pie is bigger than a larger slice of a smaller pie
How you slice the pie
determines the size of
the pie
Culture
Economy
U.S. Farmers1800 - 90 percent
U.S. Farmers1900 - 45 percent
Gasoline enginesreplaced horses
U.S. Farmers2012 - 2 percent
Productivity Growth
More people
More ideas
More innovation
More wealth
Quiz
1. What are the five types of capital?
2. What is global GDP per capita?
3. If a country is growing at 5 percent, how long will it take to double GDP?
4. What is productivity?
5. Name two types of physical capital.