GROWTH AND PRODUCTIVITY

Chapter 11

•Growth- is a rise in amount of goods and services an economy produces.

•Productivity- an output per unit of input

what is produced : what is required to produce

•Say`s law: Supply creates its own demand, named after a French

Economist, Jean Baptiste Say.• Say`s law justification is as follows:

People work and supply goods to the market because they want other goods.

Rule of 72•Divide 72 by the annual growth rate of income or any variable to get the number of years over which income or any variable will double.

Example• If you have $100 in the bank and you're earning 5%

interest, you will have $200 in about 72/5 = 14.4 years.

• If the population in the Philippines grows at 3%, it will double in 72/3 = 24 years.

• If you have a savings account with a principal of $1,000 and an interest rate of 6%, your savings will grow to $2,000 in about 72/6 = 12 years.

Specialization:•The concentration of individuals on specific detail of production, and division of labor, the cleavage of a task to allow for specialization of function.

Comparative advantage:•The ability to be better convenient to the production of one good than to the production of another good.

•Per capita growth: producing more goods and services per person

Per capita growth = % change in output - % change in population

0 = 50% - 50%

Sources of Growth

1. Investment and accumulated capital2. Available resources3. Compatible institutions4. Technological growth5. Entrepreneurship

1. Investment and Accumulated Capital:

• Physical capital accumulation and investment were once seen as the key elements to growth. This is not longer thought to be true because:-The empirical evidence does not support it.-Products and processes change.-Capital is far more than machines.

1. Investment and Accumulated Capital:•Human Capital: the skills that are associated in workers through people`s knowledge.

•Social Capital: the establishment way of doing things that directs people in how they approach production.

2. Available Resources

• Nations with an abundance of one type can trade for more of another type if needed.

• Technology can create new resources and displace others (e.g. Solar or hydrogen power might replace gasoline as the fuel of choice in cars, trucks, busses.)

3. Compatible Institutions:• Those that foster growth—must have incentives built

into them that lead people to work hard and discourage people from activities that inhibit growth.

• Private ownership of property plays an important role in growth.

• A corporation is another example of a growth-promoting economic institution because of limited liability.

• Many developing nations have merchantist policies dictating governmental permission before economic activity can take place.

4. Technological growth

• A much larger aspect of growth involves changes in technology—changes in the goods we buy and changes in the way we make goods.

5. Entrepreneurship•Consist of competitive behaviours that drive the market process

•Serves as agents of change, bring new ideas to the market and stimulate growth

Theories of Growth

•Production function: Shifts the relationship between the quantity of inputs used in production and the quantity of output resulting from production.

•Constant returns to scale: output will increase in due proportion as all inputs

•Increasing returns to scale: output increases by a greater proportionate rise than all inputs.

•Decreasing returns to scale: output increases by a smaller proportionate as all inputs.

The Law of Diminishing Marginal Productivity:

• Rising one input, keeping all others constant, will bring about smaller and smaller gains.

The Classical Growth Model•Classical growth model: a model of growth that uses all efforts in the role of capital accumulation in the growth process.

Focus on Diminishing MarginalProductivity of Labor• The Classical growth model focused on how diminishing marginal productivity of labor placed limitations on growth.

• Economists such as Thomas Malthus said that since land was fixed, diminishing marginal productivity would set in as population grew.

• As output per person declines, at some point available output would no longer be sufficient to feed the population.

Diminishing Marginal Productivity ofCapital• Increases in technology and capital overwhelmed the law of diminishing marginal productivity.

• Modern economists, such as Robert Solow, changed the focus to the diminishing marginal productivity of capital, not labour.

• They assumed population grows at a constant rate.

Technology

• Technology overwhelms diminishing marginal productivity so that growth rates can increase over time.

• Technology is the result of investment in creating technology (research and development).

• Investment in technology increases the technological stock of an economy.

The New Growth Theory•Emphasizes the role of technology rather than capital in the growth process.

•New Growth Theory separates investment in capital and investment in technology.

Technology• Increases in technology are not as directly linked to investment

as is capital.• Technological advances in one sector of the economy lead to

advances in completely different sectors.• Technological advances have positive externalities or positive

effects on others not taken into account by the decision maker.• Some basic research is protected by patents or the legal

ownership of a technological innovation that gives the owner of the patent sole rights to its use and distribution for a limited time.

Learning by Doing

• New growth theory also highlights learning by doing which is improving the methods of production through experience.

• By increasing the productivity of workers, learning by doing overcomes the law of diminishing marginal productivity.

Economic Politics to Embolden Per Capita Growth1. Policies embolden saving and investment2. Policies to control population expansion3. Policies to build up the level of education4. Policies to technologically innovate5. Policies to provide funding for research6. Policies to maximize the economy`s openness to

trade

Policies to Embolden Saving andInvestment•Modern growth theories have downplayed the importance of capital in the growth process.

•Policy makers are eager to encourage both saving and investment.

•Canada has used tax incentives to increase saving.

Policies to Control PopulationGrowth• Developing nations whose populations are rapidly

growing have difficulty providing enough capital and education for everyone

Policies that reduce population growth include:• Free family–planning services.• Increased availability of contraceptives.• One-child-per-family policies, such as Chinaadopted in

1980.

Policies to build up the level of education• Increasing the educational level and skills of the

workforce increases labor productivity.• In developing nations, the return on investments in

education is much higher than in developed nations.• Technical training in improved farming methods or

construction is more important than higher education in a developing country.

• In Canada, it is estimated that an additional year of school increases a worker’s wages by an average of 10 percent.

Policies to technologically innovate

• While all agree that technology is important, no one is sure what the best technological growth policies are.

• Patents and protecting property rights are two ways to encourage innovation.

• Well-developed financial institutions such as stock markets create liquidity and encourage investment.

Policies to provide funding for research• Individual firms have little incentive to do basic research because of technology’s “common knowledge” aspect.

• This is why the Canadian government provides most of the funding for basic research in this country.

- Canada’s spending on research and development (R&D) lags other industrialized countries.

Policies to Maximize the Economy’s Openness to Trade

•Free trade increases growth by broadening the market and by fostering competition.

• In order to specialize, you need a large market.

•Large markets allow firms to take advantage of economies of scale.

Presented by:

•Mariz Del Rio• Jung Seung Yoon(David)•Rhenrik Lim•Faith Estrada