Econ 105 Ch 7

• The difference in Living Standards across Countries


  • Productivity and Standard of Living
  • Diminishing Returns to Capital
  • Public Policy and Economic Growth
• There are great differences in living standards around the world
• Growth rates of real GDP also vary substantially, and as a result, the ranking of countries by GDP per person changes dramatically over time
• Poor countries are not necessarily doomed to poverty forever
• Rich countries can't take their status for granted. Poorer but faster-growing countries may overtake them
• Productivity


  The ability to produce output
• As productivity increases


  Workers can produce more output per unit of their labour, and the standard of living rises
• Productivity


  The amount of output produced per unit of labour
• Determinants of Productivity


  • Physical capital per worker
  • Human capital per worker
  • Natural resources per worker
  • Technological knowledge
• Production Function


  Describes the relationship between the quantity of inputs used in production and the quantity of output produced with a given technology
• Assuming constant returns to scale, the production function can be expressed as Y/L = A*F(1, K/L, H/L, N/L)
• Saving and Investment


  An economy can increase the amount of capital by increasing investment backed by higher savings
• As the capital stock rises


  The extra output produced from an additional unit of capital diminishes
• In the long run, a higher saving rate leads to a higher level of productivity and income but not to higher economic growth rates
• Catch-up Effect


  The property whereby countries that start poor tend to grow more rapidly than countries that start rich
• Because of diminishing returns to capital, the return to capital is very high in poor countries, so poor countries can grow more quickly
• Forms of Investment from abroad

  • Foreign Direct Investment (capital investment owned and operated by a foreign entity in the form of physical assets)
  • Foreign Portfolio Investment (capital investment financed with foreign money but operated by domestic residents in the form of financial assets)
• Education


  Government can increase productivity by promoting education, which increases human capital
• In Canada, each year of schooling has historically raised a person's wage by about 10 percent on average
• Some countries face a brain drain, where highly educated people leave the country
• Poor countries are poor in part because the populations are not healthy


  Their populations are not healthy in part because they are poor
• Protection of property rights and promoting political stability are two other important ways policymakers can improve economic growth
• A country with unstable political climate will also have difficulty attracting foreign (or even domestic) investment