Economic Growth and Productivity

Chapter 13

Study Questions

1. What is the standard of living and how is it measured?

2. How can the standard of living be raised?

3. What might lower the standard of living? 4. What is productivity and why is it

important?

Study Questions

5. How does specialization lead to efficiency?

6. What is necessary for specialization? 7. What is innovation and how does it

increase productivity?

Standard of Living

Our material standard of living is an indication of our economic well-being.Standard of Living = Total Output/Population

Standard of Living

How to raise the standard of living:Reduce the population?

Standard of Living

How to raise the standard of living:Reduce the population? Increase the total output!

Ideally, the increase in total output must be greater than the increase in population.

Increasing Total Output

PPC pushes outward. GDP grows. To increase the productive capability:

increase the level of resources increase the efficiency of using those

resourcesuse better technology increase economic freedom

Increase the Level of Resources

Land – use new extraction technology; shift use to more pressing needs

Labor – increase numbers; increase quality Capital – keep interest rates low; maintain a

favorable climate for investment Entrepreneurship – easy to start a business;

favorable tax/regulatory climate

Increase the Level of Technology

Encourage technological development Entrepreneurial response to changing

market conditions No government protection of mature

industries

Can the Standard of Living Be Lowered?

Yes, if:resources are decreasedeconomic freedom is restricted fail to keep up with modern technologystifling bureaucracy inhibits growthwidespread corruption existsproperty rights are poorly defined

Productivity

Productivity = Output/Input We use labor hours as a proxy for input,

so: Productivity = Output/Labor Hours

Improving Productivity

Reducing waste Improved efficiency through specialization Innovation

Reducing Waste

Inefficient processes produce both desired goods and waste products.

Improve process efficiency: fewer waste products are producedmore desired products are produced

Specialization

Division of labor:Each worker specializes in one task

improve skills gets better with practice invent new or better tools and processes

Result: more output per labor hourProductivity increases

Comparative Advantage

You can complete a task at a lower opportunity cost than others.

You should specialize in that task. They should become your customers.

Key to Increasing Standard of Living

Specialize according to comparative advantage:more output from fewer inputs

Produce a surplus amount and exchange with others for goods they have a comparative advantage in.

Result: Greater output from fewer inputs.

Innovation

Reorganize the Production Process Switch Resource Inputs Mass Production Mechanization Mass Markets

Reorganize the Production Process

Batch mode to Assembly Line moderequires specializationmultiple units in production at one time

Switch Resource Inputs

If one input’s costs rise, savings can be found by switching to an alternative input whose costs are lower.switching energy sourcesswitching from human effort to roboticscontrol by programmed computers

Mass Production

Large scale production of (nearly) identical units of output.spreads fixed costs over a large outputenables purchase of inputs at bulk ratesenables more specialization of workers and

equipmentall of these lower the average cost per unitenables sale at a lower price

Mechanization

For repetitive tasks, replace humans with specialized equipmentresult: more uniformity in results faster production runsbetter quality of output lower production costs per unit

Mechanization

Low skill repetitive jobs are eliminated. Higher skill jobs are created:

engineering designmanufacturing of equipmentoperation of equipmentmaintenance of equipment

Mass Markets

Catering to a larger market allows larger production runs.Lower costsGreater productivityMore goods required to be producedMore high skilled jobs created to operate and

maintain equipment

Results

Efficiency gains Productivity gains Increase in economic growth Increase in wages Increase in standard of living

Causes of Economic Growth - I

Increased resources available Expanded capital goods base Increased/improved technology Increased productivity Protection of individual property rights Economic freedom

Causes of Economic Growth - II

Improved infrastructure Peace and stability Low or no political corruption A favorable tax climate A favorable regulatory climate

Results of Economic Growth

More satisfactions of wants and needs by more people

Raised standard of living Reduced poverty rates Improved working conditions More leisure time Greater concern for the environment Greater ability to deal with poverty and

environmental problems

Technology helps growth

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