Download Figure 2.1 The Production Function

The Production Function
Technology … combining the
factors of production to get output
Physical capital, human capital, natural resources (“land”)
Possible Sources of Differences in Output per Worker
What
We
See
GDP and Capital per Worker, 2005
Cause – Effect – Cause
Relationship between Latitude and Income per Capita
“Fertile ground” for capitalism
Relationship between Income per Capita and Population Growth
Demographic Transition:
Mortality transition
Fertility transition
Income per Capita vs Total Fertility Rate
5-6
Nutrition versus GDP per Capita
Cause – Effect – Cause
Life Expectancy Versus GDP per Capita
Human capital indicator
Average Years of Schooling Versus GDP per Capita
Human capital indicator
Cause – Effect – Cause
Student Test Scores Versus GDP per Capita
GDP and Capital per Worker, 2005
Is Physical Capital Key to Development?
Financing Gaps and the Role of Aid
Domar growth model:
Y=kK
ΔY = kΔK = kI
g = ΔY/Y = k (I/K)
In words:
Growth rate is directly related to investment share
Fundamental truth: Uses of Y = Sources of Y
T + S + C = C + I + G + NX = C + I + G + Capital Outflow
I = S + (T – G) + Capital Inflow
I = National Saving + Capital Inflow
Financing Gaps and the Role of Aid
I = National Saving + Capital Inflow
• If poor countries can’t save much of their meager
incomes
and
• If developed country capitalists aren’t eager to
invest in poor countries
There’s a “financing gap”
Prescription:Provide aid/loans to developing countries
– They’ll pay back once they TAKE OFF
BUT: Aid can substitute for domestic saving
Aid can sustain private & public consumption
Aid needn’t/hasn’t gone to productive investment