intro to economics - productivity and human capital

8/3/2019 Intro to Economics - Productivity and Human Capital

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Productivity and Human Capital

Dr. Katherine Sauer

A Citizens Guide to Economics

ECO 1040


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Overview:

I. Standard of Living Around the World

II. Determinants of Productivity

III. Other Factors that Influence Productivity

IV. Income Inequality


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I. Standard of Living Around the World

Material World

By Peter Menzel


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Snapshot of the Global Economy (2007)

Source: World Bank World Development Indicators

GDP GNI population GNI per capita

(trillions $) (trillions $) (billions) ($)

World 54.3 52.6 6.6 7,958

Low income 0.8 0.7 1.3 578

Lower middle income 6.9 6.5 3.4 1,887

Upper middle income 6.5 5.7 0.8 6,987

High income 40.2 39.7 1.1 37,566

Low & middle income 14.2 13.0 5.6 2,337

East Asia & Pacific 4.4 2.7 0.4 2,180

Europe & Central Asia 3.2 2.7 0.4 6,051

Latin America & Caribbean 3.4 3.1 0.6 5,540

Middle East & North Africa 0.8 0.9 0.3 2,794

South Asia 1.4 1.3 1.5 880Sub-Saharan Africa 0.8 0.8 0.8 952

US 13.8 13.9 0.3 46,040

EMU 12.2 11.6 0.3 36,329

LDCs 0.4 0.4 0.8 496


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II. Productivity

is important because a countrys standard of living

depends on its ability to produce goods and services.

Productivity is the amount of goods and services a

worker produces for each hour of work.


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Why is America rich?

Examples of productivity improving our standard of

living:

- hours worked for annual food supply

1870 vs today

- average work week

- GDP per capita


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Explain The Rule of 72


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Productivity growth makes the US richer, regardless

of how fast other economies are growing.

Productivity growth is not a zero-sum game.

India Example:


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There are 4 main determinants of a nations productivity:

1. Physical Capital is the stock of equipment andstructures that are used to produce goods and services.

2. Human Capital is the knowledge and skills that

workers acquire through education, training, andexperience.

3. Natural Resources are the inputs that are provided by

nature.

4. Technological Knowledge is societys understanding

of the best ways to produce.


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1. Physical Capital

Because capital is aproduced factor of production, a

society can change the amount of capital that it has.

- in order to increase capital, firms must invest

- firms get money to do capital investment fromhousehold savings


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There is an opportunity cost of investing in capital:

- use resources to produce capital

- cant use those resources to produce goods or

services for consumption now


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savings

investment

physical capital

capital per worker

productivity

standard of living


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As the amount of physical capital in an economy increases,

diminishing returns set in.

If workers already have a large amount of capital to

work with, giving them an extra unit will not increase

their productivity by much.

If workers have only a small amount of capital, then

giving them an extra unit will increase their

productivity more.

Diminishing returns describes the situation that with more

capital, output increases, but at a decreasing rate.


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Output perworker

Capital per

worker

When there is low

capital per worker,

an increase in capitalincreases output per

worker by a lot.

When there is highcapital per worker,

an increase in capital

increases output per

work by much less.


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Diminishing returns helps to explain why a country likethe US grows slowly while a country like China grows

quickly.

An important implication of diminishing returns is thecatch-up effect.

The Catch-Up Effect says that nations that start off poor

tend to grow more rapidly than those that start off rich.


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US

China

time

GDP


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2. Human Capital encompasses a persons knowledge,

ability, and skills.

Most human capital is built through education and training.


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Governments fund public education because a better

educated population contributes to faster andsustainable development. (positive externalities)

Firms invest in employee training because they expect

to cover the costs through higher profits from higherworker productivity.

Individuals spend time and money on higher education

because they expect to earn higher wages.


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$21,491

$24,686

$33,618

$38,676

$41,226

$60,954

$71,236

$125,622

$99,995

less than 9th grade

9th to 12th grade

High School Graduate (inc. GED)

Some college, no degree

Associate's Degree

Bachelor's Degree

Master's Degree

Professional Degree

Doctorate Degree

Educational Attainment--People 25 Years Old and Over,

by Total Money Earnings in 2008

US Census Bureau / BLS: Current Population Survey, Annual Social and Economic (ASEC) Supplement

Table from PINC-03


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There may not be a return on education if

- it is of low quality

- the knowledge/skills learned dont match market

demand

- there is slow economic growth (low demand for

new workers)

- workers arepaid the same regardless of skill(centrally planned economies)


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Investing in human capital has an opportunity cost:

When students are in class they arent producing (this

opportunity cost is especially high in developing nations)

Even when primary schooling is available, many poor

children work instead of going to school.

- aspoverty is eliminated, child labor declines


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(There exists agendergap in education. Many girls do

not go to school because of cultural norms, early

childbearing, and limited employment opportunities forwomen.

- as poverty is eliminated, the gender gap remains

- national policies are needed to close the gap)


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What is the problem that underliespoverty?

HS drop outs vs college grads:

India:

Homeless in US:


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Human capital is an economic passport. Explain:

Why are fast food workers paid a relatively low wage?

Explain the relationship between the economy, human

capital and the ability to find a good job.


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3. Natural Resources

The natural resources a nation has can help it to grow.

A nation can compensate for having fewer natural

resources by investing in human capital and physicalcapital.

Just because a nation has natural resources, it is not

guaranteed to grow.

Policy is very important!


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4. Technological Knowledge

A large contributing factor for why living standards

have improved over time has been due to large

increases in technological knowledge.

- people build human capital

- people do research and development

- technology advances


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III. Other Factors that Influence Productivity

- Foreign Investment

- Health and Nutrition- Property Rights and Political Stability

- Effective Government Institutions

- Free Trade

- Population Growth


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IV. Income Inequality

In the US, the poorest 20% of households were earning

only 2% more in 2004 than they were in 1979. The

richest 20% of households were earning 63% more in

2004 than they were in 1979.

Explain this using what youve learned about human

capital.


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Explain what is happening to the gap between rich and

poor in the US. Why is this happening?

The US economy is evolving in ways that favor skilled

workers.

Explain:

Explain how international trade makes US workers thatare high-skilled better off and can make US workers

that are low-skilled worse off.


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Other Factors contributing to the wage gap:

Unions:

Hours worked:

Performance pay:


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The income gap isnt worrisome because

1)

2)

The income gap might be a problem because

1)

2)


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Final Thoughts:

Promoting the factors that play a part in productivity and

growth is a long runprocess.

Economists differin their views on the role of the

government in promoting economic growth.


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Summary:

Productivity is the main determinant of a nations

standard of living.

Human Capital is a major determinant of productivity.


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What did you learn today?

Please explain 2 concepts from todays class.

intro to economics - productivity and human capital

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