PEco Module 13

• Production and Growth is prepared by Engr Ladylyn Mendoza Culla, AAE, MBA.
• This chapter provides answers to questions about living standards and growth rates around the world.
• Productivity matters for living standards as it determines a country's standard of living.
• Productivity and its growth rate are determined by factors such as physical capital per worker, human capital per worker, and public policy.
• Public policy can affect growth and living standards by influencing factors like physical capital per worker, human capital per worker, and productivity.
• Productivity (output per unit of labor) is the main determinant of living standards in the long run.
• Growth in these factors, especially technological progress, causes growth in living standards over the long run.
• Productivity depends on physical and human capital per worker, natural resources per worker, and technological knowledge.
• Diminishing returns to capital mean that growth from investment eventually slows down, and poor countries may “catch up” to rich ones.
• Saving and investment, international trade, education, health & nutrition, property rights and political stability, research and development, population growth, and technological progress are factors that can be influenced by policies.
• Reducing consumption is equivalent to increasing saving, which funds the production of investment goods.
• Diminishing returns to capital mean that as K rises, the extra output from an additional unit of K falls.
• Public policy can affect long-run growth in productivity and living standards by influencing saving and investment.
• Increasing K requires investment, which is constrained by the availability of resources.
• Education has significant effects: In the U.S., each year of schooling raises a worker’s wage by 10%.
• The property whereby poor countries tend to grow more rapidly than rich ones is known as the catch-up effect.
• The government can encourage foreign direct investment, a capital investment that is owned and operated by a foreign entity.
• Some of the returns from foreign investment flow back to the foreign countries that supplied the funds.
• The government can increase productivity by promoting education, investment in human capital.
• The government can implement policies that raise saving and investment, causing K to rise and productivity and living standards to rise.
• Over 1960-1990, the U.S. and S. Korea devoted a similar share of GDP to investment, but growth was >6% in Korea and only 2% in the U.S., due to the catch-up effect.
• A tradeoff exists between current and future consumption.
• Foreign portfolio investment is a capital investment financed with foreign money but operated by domestic residents.
• Both technological knowledge and human capital are important for productivity.
• The production function has the property of constant returns to scale, changing all inputs by the same percentage causes output to change by that percentage.
• The production function is a graph or equation showing the relation between output and inputs: Y = A F ( L , K , H , N ).
• The production function can be represented as Y/L = A F (1, K/L, H/L, N/L), showing that productivity (output per worker) depends on the level of technology (A), physical capital per worker (K), human capital per worker (H), and natural resources per worker (N).
• Offering tax incentives for investment by local firms is a policy that could potentially boost growth and living standards in a poor country over the long run.
• Some countries are rich because they have abundant natural resources, for example, Saudi Arabia has lots of oil.
• Countries need not have much N to be rich, for example, Japan imports the N it needs.
• Technological knowledge refers to society’s understanding of the best ways to produce goods and services.
• Natural resources (N) are the inputs into production that nature provides, such as land, mineral deposits.
• Technological progress does not only mean a faster computer, a higher-definition TV, or a smaller cell phone, it means any advance in knowledge that boosts productivity, allowing society to get more output from its resources.
• More N allows a country to produce more Y.
• Human capital results from the effort people expend to acquire this knowledge.
• The world population has increased sixfold since Malthus' time.
• Many developing countries use policy to control population growth.
• Policies that affect the determinants of productivity will therefore affect the next generation’s living standards.
• Population growth can lead to lower living standards due to dilution of the capital stock.
• One of the determinants of productivity is saving and investment.