Harcourt Brace & Company Chapter 24 Production and Growth.

Harcourt Brace & Company

Chapter 24

Production and Growth


Production and Growth

• A country’s standard of living depends on its ability to produce goods and services.

• Within every country there are large changes in the standard of living over time.


Economic Growth Around the World(SEE Table 24-1)

• Living standards, as measured by per capita real GDP, vary significantly among nations.

• The most developed countries have real per capita GDP that is ten to twenty times that of the poorest countries.


The Rule of 70 (or 72)

• Annual growth rates that seem small become large when compounded for many years.

• Rule of 70: The value of a variable will double in approximately (70 ÷ annual growth rate) years.


The Rule of 70: Example

$5,000 invested at 7 percent interest per year, will double to $10,000 in 10 years.

70 ÷ 7 = 10


The Rule of 70: Example

Suppose $5,000 is invested at 3 percent. Your investment will now take about 23 years to double.


Productivity: Its Role and Determinants

• A key to economic growth is “Productivity.”

• Productivity refers to the quantity of goods and services that a worker can produce for each hour of work.


How Productivity is DeterminedThe Factors of Production include:

– Physical Capital

– Human Capital

– Natural Resources

– Technological Knowledge


The Factors of Production: Physical Capital

• The stock of equipment and structures that are used to produce goods and services.

• Examples:– Tools used to build or repair automobiles

– Computers to assist in data processing

– Buildings, factories, etc.


The Factors of Production: Human Capital

• The economist’s term for the knowledge and skills that workers acquire through education, training, and experience.

• Like physical capital, human capital raises a nation’s ability to produce goods and services.


• Inputs used in production that are provided by nature, such as land, rivers, and mineral deposits.

• Renewable Resources: trees, water• Non-Renewable Resources: oil, coal

The Factors of Production: Natural Resources


The Factors of Production: Technological Knowledge

• The understanding of the best ways to produce goods and services.

• Technological Knowledge relates to research/development, new products/inventions, technical improvements, etc.


Economic Growth and Public Policy

• Public policies, laws, traditions, and institutions are critical to transforming resources into useful output.

• Governments can do many things to encourage or impede the attainment of high living standards.


Economic Growth and Public Policy

Government policies:– Encourage saving and investment

– Encourage education and training

– Establish secure property rights and political stability

– Promote free trade policies

– Impact population growth

– Promote research and development


Government policies: Encourage saving and investment

• One way to raise future productivity is to invest more current resources in the production of capital (Figure 24-1).

• Governments can encourage capital accumulation:– from domestic sources by providing tax

incentives.– from foreign sources by making such

capital secure and welcome domestically.


Government policies: Encourage education and training

• Education is at least as important as investment in physical capital.

• Basic education is funded by government so that the work force can acquire skills.


Government policies: Establish secure property rights and political stability

• Property rights refer to the ability of people to exercise authority over the resources they own. A defense of property rights is necessary for investment and economic growth.

• Stable Monetary and Fiscal Policy promote economic growth.


Government policies: Promote Free Trade

• To exploit comparative advantage and maximize production and efficiency, it is important for countries to have the opportunity to sell abroad and to be able to purchase from lower cost producers.

• Inward-Oriented vs. Outward-Oriented trade policies


Government policies: Control of Population Growth

• Problems of excessive population growth

• Problems of slow population growth• What can governments do about

population growth?• GDP per person


Government policies: Research and Development

• The advancement of technological knowledge has led to higher standards of living. Technological advancement comes from private firms and public agencies.

• Government’s role is to encourage the research and development of new technologies through research grants, tax breaks, and the patent system.


Conclusion

• Living standards, as measured by real GDP per capita, vary substantially from country to country.

• Productivity is a key determinant of economic growth

• Government policies and actions can facilitate or impede economic growth.

Harcourt Brace & Company Chapter 24 Production and Growth.

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