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ECON 100 Lecture 22
Wednesday, April 30
Midterm Exam #2
Friday, May 16, 6:30 P.M.
Production and Growth
Questions
1. What are the facts about living standards and growth rates
around the world?
2. What is productivity and why does it matter for living
standards?
3. What determines productivity and its growth rate?
4. What can governments do to raise productivity? How can
public policy affect growth and living standards?
Q1, facts, summarized…
1. Economic prosperity, (measured by per capita GDP), varies a
lot across countries.

The per capita incomes in rich countries are 40 – 50 times that in the
poor countries.
2. Per capita GDP growth rates (adjusted for inflation) also vary
a lot across countries.
Incomes
and Growth
Around the
World
FACT 1:
Big differences in
living standards
around the world.
GDP per
Growth rate,
capita, 2009 1970–2009
China
Singapore
India
Japan
Spain
Israel
Colombia
United States
Canada
Philippines
Rwanda
New Zealand
Argentina
Saudi Arabia
Chad
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
$6,828
$50,633
$3,296
$32,418
$32,150
$27,656
$8,959
$45,989
$37,808
$3,542
$1,136
$28,993
$14,538
$23,480
$1,300
7.4%
4.7%
3.3%
2.2%
2.1%
2.1%
1.9%
1.8%
1.7%
1.3%
1.1%
1.1%
1.0%
0.6%
0.4%
6
Incomes
and Growth
Around the
World
China
Singapore
India
Japan
FACT 2:
Spain
Great variation in Israel
growth rates
Colombia
across countries. United States
Canada
Philippines
Average growth rate
over a 40 year period! Rwanda
New Zealand
Argentina
Saudi Arabia
Chad
GDP per
Growth rate,
capita, 2009 1970–2009
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
$6,828
$50,633
$3,296
$32,418
$32,150
$27,656
$8,959
$45,989
$37,808
$3,542
$1,136
$28,993
$14,538
$23,480
$1,300
7.4%
4.7%
3.3%
2.2%
2.1%
2.1%
1.9%
1.8%
1.7%
1.3%
1.1%
1.1%
1.0%
0.6%
0.4%
7
Growth Rates and the Rule of 70
Growth rate from one year to the next
 yt 1  yt
g t ,t 1  
 yt

 100%

• Per capita GDP grows at the rate of 2.5% every year.
• How many years are needed for the per capita GDP
to double? Say from $10,000 to $20,000?
Growth Rates and the Rule of 70
If we assume that the growth rate is constant, then
Number of years to double 
70
Growth rate
• Per capita GDP grows at the rate of 2.5% every year.
• How many years are needed for the per capita GDP
to double? Say from $10,000 to $20,000?
• 70/2.5 = 28 years!
Now
• Per capita GDP grows at the rate of 3% every year.
• How many years are needed for the per capita GDP
to double? Say from $10,000 to $20,000?
• 70/3 = 23 years!
Growth Rates and the Rule of 70
If per capita GDP grows at 7%, then it doubles every 10 years.
If per capita GDP grows at 2%, then it doubles every 35 years.
Growth Rates and the Rule of 70
If real GDP per capita doubles every 10 years, most people in
the country see significant increases in their living standards
over the course of their lives.
If real GDP per capita doubles only every 100 years, then the
increase in living standard is much lower.
Questions
2. What is productivity and why does it matter for living
standards?
Productivity
A country’s standard of living depend on its ability to produce
goods and services.
This ability depends on productivity.
Productivity is defined as the average quantity of goods and
services produced per unit of labor input.
Y = real GDP = quantity of output produced
L = quantity of labor
So productivity = Y/L (output per worker)
Why Productivity Is So Important
• When a nation’s workers are very productive, real GDP is large
and incomes are high.
• When productivity grows rapidly, so do living standards.
Imagine a very advanced economy where the productivity level
is so high that…
The Universal Replicator
The Universal Replicator is a machine that can replicate any
physical good.
The Universal Replicator (UR)
Example: If a car is put into the Universal Replicator, the machine
will create an exact working duplicate at the touch of a button.
The UR will work on any non-living object.
No replication of humans. (or live animals)
Assume that this technology is widely used in the country by all
producers.
No one has a monopoly of the UR!
The Universal Replicator (UR)
1. What impact will the UR have on the economy?
A. What jobs will not be needed?
B. What kinds of jobs will still be necessary?
C.
What will happen to the price of goods?
2. What benefits do you see?
3. What kinds of problems do you expect?
Of course, the Universal Replicator
doesn’t really exist but…
technological change has had very similar effects.
The long-term advances in agriculture: Two hundred years ago,
80% of the U.S. labor force worked in farming.
Today, farming accounts for only 2% of jobs.
Agricultural production has increased tremendously and food
prices have decreased substantially.
Manufacturing has followed a similar, but less extreme path.
Fewer workers now produce more goods (which means lower
costs and lower prices).
As agricultural and manufacturing employment decline, more
workers find employment in the service sector.
Lower prices for agricultural and manufactured goods mean
services become relatively expensive.
Many public issues, such as health care, education, and police
protection, are affected by this increase in the relative cost of
services.
Like the Universal Replicator, technological progress increases
material well-being.
But questions remain:
What happens to displaced workers?
What happens to the distribution of income?
How are by-products, wastes, and pollution handled?
Now back to
What determines productivity and its
growth rate?
Questions
3. What determines productivity and its growth rate?
Physical Capital Per Worker
• The stock of equipment (tools and machinery) and structures
(buildings) used to produce goods service is called [physical]
capital, denoted K.
• K/L = capital per worker.
• Productivity is higher when the average worker has more
capital (machines, equipment, etc.).
• i.e., an increase in K/L causes an increase in Y/L.
Human Capital Per Worker
• Human capital (H):
the knowledge and skills workers get through education,
training, and experience.
• H/L = the average worker’s human capital
• Productivity is higher when the average worker has more
human capital (education, skills, training, etc.).
• i.e., an increase in H/L causes an increase in Y/L.
Natural Resources Per Worker
• Natural resources (N): the inputs into production that nature
provides, e.g., land, mineral deposits
• Some countries are rich because they have abundant natural
resources (e.g., Saudi Arabia has lots of oil).
• But countries need not have much N to be rich (e.g., Japan
imports the N it needs).
Technological Knowledge
• Technological knowledge: society’s understanding of the best
ways to produce goods and services.
• 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 increases
productivity (allows society to get more output from its
resources).
– e.g., Henry Ford and the assembly line.
Tech. Knowledge vs. Human Capital
• Technological knowledge = society’s understanding of how to
produce goods and services.
• Human capital results from the effort people expend to
acquire this knowledge.
• Both are important for productivity.
Questions
4. What can governments do to raise productivity? How can
public policy affect growth and living standards?
Government Policies That Raise Productivity and Living
Standards
•
Encourage saving and investment.
–
•
Encourage education and training.
–
•
More physical capital, this will raise K/L
More human capital, this will raise H/L
Promote research and development.
–
This will improve the available technology
Government Policies That Raise Productivity and Living
Standards
•
Establish secure property rights and maintain political
stability.
•
Promote free trade.
•
Control population growth.
•
Wonderful book, 23 things they don’t tell you about
capitalism, by Ha Joon Chang
Ha-Joon Chang: The net isn't as important as we think
The economist and author says the washing machine changed
the world more than the internet, a tool we overestimate while
ignoring its downsides
In his new book, 23 Things They
Don't Tell You About Capitalism,
Chang debunks many cherished
myths about the free market. In
one chapter, he says: "The washing
machine changed the world more
than the internet."
http://www.theguardian.com/technology/201
0/aug/29/my-bright-idea-ha-joon-chang
End of Part 1
Please do the multiple choice
questions now.
Part 2
Capital in the Twenty-first Century,
by Thomas Piketty
”a sweeping account of rising inequality”
“it could change the way we think about the past two
centuries of economic history.”
- The Economist
Hardcover: 696 pages
Product Dimensions: 9.6 x 6.6 x 1.9 inches
Shipping Weight: 2.3 pounds
Thomas Piketty in his office in Paris. Photograph: Ed Alcock for the Guardian
• Thomas Piketty teaches at the Paris School of Economics. He
has spent nearly two decades studying inequality.
• He received his PhD in economics at the age of twenty-two.
(École Normale Supérieure, 1993.)
• He taught at M.I.T for two years, after which he returned to
Paris. Since then he has “not left Paris, except for a few brief
trips.”
Income inequality in the US
share of the richest 10% in total income
http://www.newyorker.com/online/blogs/johncassidy/2014/03/pikett
y-looks-at-inequality-in-six-charts.html?intcid=obnetwork
Wealth inequality
Europe and the US
share of the richest 10% (and 1%) in total wealth
In the United States in 2010 …
the top 10% of households owned 70% of all the country’s
wealth ( ≈ “capital”)
The top 1% of households owned 35% of the wealth.
The bottom half of households owned five per cent.
When the rate of return on capital—the annual income* it
generates divided by its market value—is higher than the
economy’s growth rate, capital income rises faster than wages
and salaries, which don’t grow faster than G.D.P.
* dividends, capital gains, interest payments, profits, and rents)
When income generated by capital grows rapidly, the richest
families benefit disproportionately.
Since 2009, corporate profits, dividend payouts, and the stock
market have all risen sharply, but wages have not increased.
As a result, according to calculations by Piketty and Saez, almost
all of the income growth in the US economy between 2010 and
2012—ninety-five per cent of it—went to the one per cent.
http://www.newyorker.com/arts/critics/books/
2014/03/31/140331crbo_books_cassidy?curre
ntPage=all
Thomas Piketty
The economy’s growth rate has “always” been below the rate of
return to capital
The 20th century was a historic exception that is unlikely to be
repeated.
In the coming decades the growth rate will fall back below the
rate of return, and the “consequences for the long-term
dynamics of the wealth distribution are potentially terrifying.
Read more about the book
at the New Yorker website
http://www.newyorker.com/arts/critics/books/2014/03/31/1
40331crbo_books_cassidy?currentPage=all
at the Guardian
http://www.theguardian.com/books/2014/apr/28/thomaspiketty-capital-surprise-bestseller
End of the lecture