Production and Growth
Production and GrowthA country’s standard of living depends on its ability to produce goods and services. Within a country there are large changes in the standard of living over time.In the United States over the past century, average income as measured by real GDP per person has grown by about 2 percent per year.
Economic growth is the increase in the amount of the goods and services produced by an economy over time.
It is conventionally measured as the percent rate of increase in real GDP.
Economic growth
amount of labour increase labour productivity increase
Reasons of economics growth
Population growth Migration of workers Decrease of unemployment rate Increase of the number of working hours per
person Higher retirement age
Amount of labour increase
Productivity refers to the amount of goods and services produced for each hour of a worker’s time.
A nation’s standard of living is determined by the productivity of its workers.
Production and Growth
Economic Growth Around the World
Living standards, as measured by real GDP per person, vary significantly among nations.
Table 1 The Variety of Growth Experiences
Copyright©2004 South-Western
Annual growth rates that seem small become large when compounded for many years.
Compounding (compound interest ) refers to the accumulation of a growth rate over a period of time.
Compounding and the Rule of 70
Compounding and the Rule of 70
According to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately 70/x years.
$5,000 invested at 7 percent interest per year, will double in size in 10 years
70/ 7 = 10
An Example of the Rule of 70
i – interest ratek – number of years
Compound interest
GDPiGDP k 2)1(
Calculate in how many years time will GDP double it’s value if the interest rate is equal to 5%.
k = 14,2 so GDP will double it’s value after 15 years
Example 1
GDPGDP k 2%)51(
051
2k2k 051 ,ln
lnlog ,
Calculate the growth rate if GDP is to double in 10 years.
Interest rate must be equal to 7,2%
Example 2
GDPxGDP 2)1( 10
12x 10
Encourage saving and investment.Encourage investment from abroad
Encourage education and training.Establish secure property rights and maintain political stability.
Government Policies That Raise Productivity and Living Standards
Promote free trade.Promote research and development.
Government Policies That Raise Productivity and Living Standards
The Importance of Investment
There is definitely a link between investment today and growth in the future.
(a) Growth Rate 1960-1991 (b) Investment 1960-1991
South Korea
Singapore
Japan
IsraelCanada
Brazil
West Germany
MexicoUnited Kingdom
Nigeria
United States
IndiaBangladesh
Chile
Rwanda
Growth Rate (percent)0 1 2 3 4 5 6 7
South Korea
Singapore
Japan
IsraelCanada
Brazil
West Germany
MexicoUnited Kingdom
Nigeria
United States
IndiaBangladesh
Chile
Rwanda
Investment (percent of GDP)0 10 20 30 40
Growth and Investment
As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns.
Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while.
Thus small countries can grow faster than big countries.
The catch-up effect refers to the condition that, other things being equal, it is easier for a country to grow fast if it starts out relatively poor.
Once the country becomes richer, diminishing returns sets in.
Catch-up effect
For a country’s long-run growth, education is at least as important as investment in physical capital.◦ Human Capital In the United States, each year of schooling raises
a person’s wage on average by about 10 percent. Thus, one way the government can enhance the
standard of living is to provide schools.
Education
Trade is, in some ways, a type of technology.
A country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance.
Free Trade
The advance of technological knowledge has led to higher standards of living. Most technological advance comes from private
research by firms and individual inventors. Government can encourage the development of
new technologies through research grants and the patent system.
Research and Development
Gross domestic expenditure on research and development (GERD) includes expenditure on research and development by:◦ business enterprises, ◦ higher education institutions, ◦ government and private non-profit organizations.
Gross domestic expenditure on R & D (GERD)
GERD
http://windward.hawaii.edu/facstaff/briggs-p/Macroeconomics/macrolectures.htmCzarny Bogusław, Podstawy Ekonomii, PWE
2002www.wikipedia.org
Bibliography:
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