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CHAPTER CHAPTER 11 Growth in production and income over decades and centuries Chapter outline and learning objectives Growth in production, health and leisure over decades/centuries The Industrial Revolution and Enlightenment Productivity Factors of production: physical capital; human capital; ideas and technology; social, legal and political institutions; natural resources and geography Diminishing marginal productivity Positive externalities and public goods International trade and finance Population growth 1 Growth in production over decades/centuries For many countries, the real value of domestic production per person or per capita has grown over generations. In the US, the real value of domestic production per person has risen by more than a factor of 8 since 1900. The real value of US domestic production per person (capita), 1900-2012 The average American produces and buys more than 8 times as many goods and services in markets now as in 1900. © 2015 Pearson Education, Inc. 2 Growth in production over decades/centuries Country Japan Brazil Mexico Germany Canada China United States Argentina United Kingdom India Indonesia Pakistan Bangladesh Period 1890-2008 1900–2008 1900–2008 1870–2008 1870–2008 1900–2008 1870–2008 1900–2008 1870–2008 1900–2008 1900–2008 1900–2008 1900–2008 Price-adjusted value of Price-adjusted value of marketable production marketable production Average per person at beginning per person at end of growth rate per of period (in US$ in 2008) period (in US$ in 2008) year 1504 35220 2.71 779 10070 2.40 1159 14270 2.35 2184 35940 2.05 2375 36220 1.99 716 6020 1.99 4007 46970 1.80 2293 14020 1.69 4808 36130 1.47 675 2960 1.38 891 3830 1.36 737 2700 1.21 623 1440 0.78 Source: Robert J. Barro and Xaivier Sala-i-Martin and World Development Report 3 Value of domestic production per person in 2011† The value of marketable domestic production per person varies widely across countries. Average growth rate of domestic production from * to 2011 * from Singapore 51146 7.8% 1961 US 42244 3.2% 1951 Australia 38513 3.6% 1951 Canada 36704 3.6% 1951 Germany 35361 3.5% 1951 UK 32093 2.4% 1951 Japan 31867 4.8% 1951 Korea 30051 7.0% 1951 Saudi Arabia 27942 4.4% 1971 Spain 25748 4.2% 1951 Portugal 20071 3.8% 1951 Russia 14899 0.8% 1991 Argentina 14765 3.0% 1951 Iran 14478 5.0% 1951 Chile 14280 4.2% 1951 Mexico 12575 4.5% 1951 China 10538 7.8% 1951 Brazil 9391 5.1% 1951 Indonesia 4600 5.4% 1960 Source: Penn World Table Version 8.1, Philippines 4516 4.4% 1951 India 3780 5.1% 1951 http://knoema.com/PWT2015/pennworld-table-8-1?action=download Honduras 3143 3.7% 1951 Nigeria 2480 4.0% 1951 Bangladesh 1888 3.6% 1960 Kenya 1702 3.8% 1951 Mali 1101 3.7% 1960 †Value of domestic production is measured in US$ using prices from 2005 Value of domestic production per person in 2011† Growth rates of marketable domestic production per person per year also varies widely across countries. of domestic production is measured in US$ using prices from 2005 * from China 10538 7.8% 1951 Singapore 51146 7.8% 1961 Korea 30051 7.0% 1951 Indonesia 4600 5.4% 1960 Brazil 9391 5.1% 1951 India 3780 5.1% 1951 Iran 14478 5.0% 1951 Japan 31867 4.8% 1951 Mexico 12575 4.5% 1951 4516 4.4% 1951 Saudi Arabia 27942 4.4% 1971 Spain 25748 4.2% 1951 Chile 14280 4.2% 1951 Nigeria 2480 4.0% 1951 Kenya 1702 3.8% 1951 20071 3.8% 1951 Mali 1101 3.7% 1960 Honduras 3143 3.7% 1951 Australia 38513 3.6% 1951 1888 3.6% 1960 Philippines †Value Average growth rate of domestic production from * to 2011 Portugal Source: Penn World Table Version 8.1, Bangladesh Canada 36704 3.6% 1951 http://knoema.com/PWT2015/pennworld-table-8-1?action=download Germany 35361 3.5% 1951 US 42244 3.2% 1951 Argentina 14765 3.0% 1951 UK 32093 2.4% 1951 Russia 14899 0.8% 1991 Growth in health over decades/centuries With rising incomes, we can afford more and better health care and diets, • and therefore expect to live longer lives. Life expectancy at birth by country, 1900 and 2013 © 2015 Pearson Education, Inc. 6 Growth in health over decades/centuries Charles Kenny at the World Bank argues that many African countries have not seen rapid increases in production, • but some have still seen rapid advances in health, education, and civil and political liberties. William Easterly similarly argues that changes in health, education and liberties can occur independently of changes in production • and therefore improve a nation’s standard of living. Nonetheless, there is usually an association between production per person and health because health services and education are produced. 7 Growth in leisure over decades/centuries With rising incomes, we can also afford more and leisure, and not have to work as hard or as long. As lifetimes increase due to better health, we can have a longer retirement. Better technologies mean less time and effort are required to produce the same amount of goods and services. © 2015 Pearson Education, Inc. Lifetime hours of leisure in the US, 1880, 1995, 2040 (est.). Source: Robert Vogel 8 Growth in production over decades/centuries Economic growth is not inevitable. • Most of human history has seen little improvement in production: • For the average person, economic life in 1800 was not much different than economic life in 800 or even 800 B.C., • although kings and nobles could enjoy lavish lifestyles, especially after 1500. • Poor countries today still live basically in the same way that they did centuries ago. • Many fear that the 21st century will be a period of a “new normal” in which we have reached the limits of growth • and that income and economic welfare will stagnate. 9 Growth in production over decades/centuries On the other hand, some countries have seen huge economic improvements during the last 30-60 years: • Singapore, Korea, Malaysia, Taiwan, Portugal, Spain, Brazil, Mexico and even China and India. 10 Real value of domestic production per person in 2012 The real (price-adjusted) value of domestic production per person in US$, by country in 2012 © 2015 Pearson Education, Inc. 11 A typical family with all their possessions in the UK, a rich country Value of marketable production per person: $33,386 Life expectancy: 79 years Adult literacy: 99% 12 A typical family with all their possessions in Mexico, a middle income country Value of marketable production per person: $11,630 Life expectancy: 76 years Adult literacy: 92% 13 A typical family with all their possessions in Mali, a poor country Value of marketable production per person: $999 Life expectancy: 50 years Adult literacy: 46% 14 Growth in production over decades/centuries Why have some countries been able to produce more per person and now enjoy an improving economic lifestyle, while others have not? We start to address this question by realizing that rich countries today were once poor: 15 The Industrial Revolution and Enlightenment Significant growth in production per person did not really begin in the world until the Industrial Revolution in England about 1750. • Before this, production of most goods had relied on human or animal power. • Changes in science and engineering saw the creation of machines and mechanical power. From about 1620-1780, writers in England and other parts of Europe advocated the Enlightenment, which emphasized • science, objectivity and rationality (versus religious thinking). • free thinking, free press and liberty (versus royal or religious power). • the rule of objective and rational laws (versus fickle and arbitrary royal or religious power). 16 The Industrial Revolution and Enlightenment Douglass North argues that the Glorious Revolution of 1688 removed the absolute power of the king and allow many nobles in the Parliament to govern the country and to run the economy. The court system also became independent of the king after 1688. • Courts were able to uphold contracts, allowing people to make contractual economic transactions. • Property (land) rights were also enforced through courts. • Taxes had to be approved by Parliament, and could not be arbitrarily collected by the king. • Serfdom had ended in England and parts of Scotland, so the agricultural economy and land ownership was largely free. Mr. North argues that because of legal rights and a relatively free economy; nobles, merchants and land holders were able to grow rich through production and commerce. 17 The Industrial Revolution and Enlightenment In contrast, France, Spain, Portugal, Germany, Poland, Russia, Italy, Japan, China, India had kings and serfdom or class systems until 19 th century or later. • As a result, political and economic power were concentrated at the top, and the ability to freely produce was restricted and/or not protected by independent courts. 18 Productivity In general, economies grow because workers become more productive. • Labor productivity is the amount of production from one worker or one hour of work. • Labor productivity can increase because • firms invest in physical capital for their workers. • individuals or society more broadly invests in human capital or education and training. • firms or society more broadly invests in new ideas/technology. 19 Productivity Questions: • What makes workers productive? • Why are some countries richer than others? • Why do some countries grow quickly while others seem stuck in a poverty trap? • What policies may help raise growth rates and long-run living standards? Economists do not really know, but several factors can increase the productivity of workers: 20 Productivity a. Business investment in fixed or physical capital b. Government investment in fixed or physical capital c. Investment in education, training or “human capital” d. Investment in health or “human capital” e. Investment in and research and development of technology and new ideas f. Stable and effective social, legal and political institutions g. Natural resources, including ports, rivers and other geography, which can affect: h. Exchange of products or trade i. Exchange of productive ideas (see also e.) 21 Physical or fixed capital Physical or fixed capital Capital derives from the Latin word for head, as denoting the head of cows, oxen or other livestock, which have always been important sources of wealth beyond the basic meat that they provide. Livestock served and serves as a basic way to produce additional goods and services over time, including milk, hides, wool, meat and fuel, transportation, traction for plowing fields for grain, and of course through reproduction, additional livestock. More broadly, capital today refers to an asset or good that can be used to produce other goods and services, to increase productivity and to increase production. 22 Physical or fixed capital Physical capital refers to goods that were produced in the past or in the present (with previous or existing technology) but are currently used to produce other goods or services. • In particular, equipment, physical structures and infrastructure that are used to produce and sell. • Tools and other machines used to manufacture goods • Computer software and hardware • Office buildings, schools, factories and other structures • Physical infrastructure: roads, railroads, airports, water utilities, sanitation utilities, electric utilities, telephones, internet connections 23 Physical or fixed capital (Business) investment expenditure refers to investment in physical capital by businesses or firms, a process also “fixed capital formation” • to distinguish it from investment in inventories, which are not fixed. Government expenditure can also invest in fixed or physical capital, often • roads, railroads, airports, electric utilities,…. 24 Sources: World Bank, http://databank.worldbank.org/data/ Myanmar Yemen Namibia Tuvalu Afghanistan Swaziland Congo, Rep. Timor-Leste Zimbabwe Benin Haiti Angola Eritrea Gambia Somalia Sudan Togo Cambodia North Korea Vanuatu Ethiopia Guinea Mali Kenya Solomon Islands Zambia Mauritania Lesotho Mozambique Uganda Papua New Guinea Rwanda Congo, Dem. Rep. Madagascar Tanzania Niger Sierra Leone Burkina Faso Central African Rep. Liberia Malawi Burundi Chad South Sudan percent Physical or fixed capital Percent of population with access to electricity in selected poor countries, 2012 52 50 48 46 44 42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 25 Human capital Other kinds of investment expenditure and capital (formation), sometimes subsidized by the government, include: 26 Human capital Human capital refers to knowledge, skills and mental abilities that workers acquire through education, training and experience. • This type of learning refers to acquiring existing knowledge that is readily available. • Because others in society may benefit when an individual accumulates more knowledge, skills and mental abilities, human capital creation can generate positive externalities. • A positive external effect on people who are not directly involved in a transaction (in the education system). 27 Human capital Education and training is supposed to make workers more productive. • Many governments provide schools and subsidize education and training programs so that people become more productive members of society. • Brazil has a policy which pays families if their children attend school regularly. • But more schools and education may not necessarily improve productivity: • opportunity costs: staying in school means not working • corruption and ineptness of school systems The data about education does not always offer a clear picture, although richer countries are generally more educated: 28 Human capital Income and education by country 140 percent in 2010 or nearest year: may be more than 100% because of people younger and older than normal students 45000 130 GDP per person in 2009 in US$ 40000 120 110 35000 100 30000 90 80 25000 70 20000 60 50 15000 40 10000 30 20 5000 10 GDP per person (left scale) Mali Rwanda Kenya Bangladesh Haiti Nigeria Philippines India China Brazil Mexico Argentina Chile Portugal Saudi Arabia Korea Israel Spain Japan Germany UK Canada US 0 Australia 0 gross secondary school enrollment rates (right scale) Sources: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, http://pwt.econ.upenn.edu World Bank, http://databank.worldbank.org/data/ 29 Human capital Income growth and education by country 140 percent in 2010 or nearest year: may be more than 100% because of people younger and older than normal students 6% average growth rate of real GDP per person 130 5% 120 110 4% 100 90 3% 80 70 2% 60 50 1% 40 30 0% 20 10 GDP per person (left scale) Mali Rwanda Kenya Bangladesh Haiti Nigeria Philippines India China Brazil Mexico Argentina Chile Portugal Saudi Arabia Korea Israel Spain Japan Germany UK Canada US 0 Australia -1% gross secondary school enrollment rates (right scale) Sources: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, http://pwt.econ.upenn.edu World Bank, http://databank.worldbank.org/data/ 30 Human capital Human capital can also refer to the physical health of humans instead of only mental abilities. • More healthy workers in particular allows an economy to produce more goods and services. • Physical health also has positive externalities, especially when dealing with the absence of contagious diseases. 31 Diminishing marginal productivity Some factors of production—especially labor services, physical capital and human capital—have diminishing marginal productivity. • Each additional unit increases productivity at a lower rate than previous units. For example, • the 1st tractor is very productive for farm production, but the 10th tractor should be less productive. • the 1st worker is very productive for farm production but the 10th worker should be less productive (unless specialization and cooperation occur). • during the 1st year of education you can learn a lot, but 10th year is less productive (unless specialization occurs). 32 Diminishing marginal productivity However, diminishing marginal productivity does not always occur. • Learning, specialization, cooperation and trade can allow each worker to be more productive when there are many workers. • Decreasing costs from a larger scale of production (which can be related to learning, specialization and cooperation) can allow each worker/unit of capital to be more productive when there are many workers/units. And by definition, marginal productivity of a factor requires that other factors remain the same, but other factors are often not the same. 33 Diminishing marginal productivity When diminishing marginal productivity occurs, rich countries (with a lot of physical and human capital) should grow more slowly than poorer countries. • Poor countries should grow very rapidly as additional physical and human capital is added to the economy. • Rich countries should not receive such a large benefit from additional human and physical capital. Poor countries are therefore predicted to “catch up” to rich ones if other factors are the same. Data show that some poorer countries, like China, have grown quickly, while others, like Mali, have not: 34 Catching up to rich countries? Some (previously) poor countries have grown more quickly than the US and other rich countries since 1960, • but many have not. © 2015 Pearson Education, Inc. 35 Ideas and technologies Many ideas and knowledge are useful to produce new goods and services or existing goods and services more efficiently. • Ways to better arrange workers and capital in production processes to make them more efficient, or to create new and improved capital or consumer goods, or to improve the health and efficiency of workers. • This type of learning refers to inventing, discovering or finding new knowledge that is not readily available. • They are created by research and development. • Because others in society may benefit when new knowledge is created, technological knowledge and ideas can also generate positive externalities. 36 Ideas and technologies Property rights give people a legal right over property, not only land and other physical assets but also intangible assets like ideas that come from research and development. • If ownership of land and real estate is legally protected in courts, we will likely invest more in them to earn a return. • If ownership of wages from work is legally protected in courts, we likely work more to earn revenue. • If ownership of ideas is legally protected in courts, we will likely invest more in them to earn revenue. Enforcement of property rights is necessary for a market economy based on private property to work well. 37 Ideas and technologies To protect intellectual property rights, rich countries typically enforce • patents, which offered to inventors of new products and technologies to reward them for their research and development. • copyrights, which are exclusive rights to the products created through original thinking: writing, audio, visual and other artistic or non-artistic work. • trademarks, which are exclusive rights to use a mark, logo, brand, name or other information that is associated with a product. 38 Ideas and technologies Due to a patent system which grants property rights to the benefits of research and development, most technological knowledge comes from private research by firms and individual inventors. But because benefits of research and development are not fully captured by the private sector, governments often subsidize research and development through research grants, government institutions and the tax system. 39 Positive externalities and public goods Governments need to protect intellectual property rights, • when ideas and technologies are public goods: freely available to the public so that producers can not earn revenue from them. • The public or society can widely benefit from ideas (without paying), • which is good for society but bad for those who must work in research and development. And because ideas and technologies can be used widely by the public or society, • they might not experience diminishing marginal productivity, at least for a long while. But because ideas and technologies have positive externalities for society, individuals and private firms have little incentive to generate the socially optimal amount. 40 Positive externalities and public goods Because ideas, technologies and human capital have positive externalities and/or are public goods, governments should • protect intellectual property with patents and copyrights • subsidize research and development • subsidize education • Educated individuals benefit others in society. • subsidize health care • Healthy individuals benefit others in society. 41 Ideas and technologies Traditional economic growth theory from 1956, developed by Robert Solow, focused on business investment in physical capital. • During the 1940s-1960s modern economies focused on manufacturing and construction. 42 Ideas and technologies Paul Romer developed the endogenous growth theory in 1986 to explain investment in new technologies through research and development. • Instead of investment in physical capital in traditional industries like manufacturing and construction, • Mr. Romer argued that rising living standards come from investment in research and development of new technologies—new machines, new medicines, new fuels, new forms of transportation,… • His theory was called an “endogenous” theory because it tries to explain how new technologies are created: • through investment in research and development by firms and governments. 43 Ideas and technologies Another (old) theory about economic growth comes from Joseph Schumpeter in 1942, called creative destruction. • He argued that new technologies are created from new ideas, which modernizes the economy, and at the same time “destroys” old and outdated parts of the economy. • Example: The automobile replaced the horse-drawn carriage. The creation of the automobile destroyed the horse carriage industry, for a more efficient and productive economy. • E-mail and personal computers replaced (destroyed) the fax industry and typewriter industry. 44 Social, legal and political institutions Institutions (formal or informal rules, principles and ways of thinking) influence our behavior and might also be important in explaining economic growth. • enforcement of property rights: rules of ownership • rule of law in general • regulations that are intended to make the financial and economic system more efficient. • regulations that prevent fraud • regulations that require publication of information to inform consumers • political and economic institutions that promote sustainable fiscal and monetary policies by the national government and the central bank 45 Social, legal and political institutions • social order, trust, reciprocity: informal principles to align individual interests with social interests • lack of (civil) war and violence: fighting and killing is very unproductive, to say the least • the state (government) is supposed to have a monopoly on the use of violence, but sometimes the government abuses its power. • democratic institutions that maintain social order and reduce political unrest?? 46 Social, legal and political institutions But in many poor countries, property rights and other laws are not well enforced by courts and the police. • Breach of contracts, theft, fraud and corruption are often not punished by courts. • Bankruptcy of firms may leave creditors no way to legally recover their investments. • Firms may need to bribe others to secure contracts or to acquire permission from the government. Uncertainty over whether property rights will be enforced and protected can be a big impediment to investment. In many poor countries, violent crime rates are also high relative to rich countries: 47 Social, legal and political institutions Intentional homicides by selected countries, 1995-2013 75 70 65 60 55 per 100,000 people 50 45 Argentina Colombia 40 Costa Rica Guatemala 35 Mexico 30 UK US 25 Korea 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: World Bank, World Development Indicators, http://databank.worldbank.org/data/ 48 Natural resources and geography Natural resources and geography might also be helpful in allowing countries to increase production and productivity. • Natural resources are provided by nature: land, trees, water, coal, bauxite, petroleum, iron ore, copper ore, ocean ports, rivers,…. • Geography like ocean ports and rivers is associated with trade and the exchange of ideas (technology). • Geography may be very important because it allows people to exchange products, ideas and technology. 49 Other factors Besides the above “factors of production”, other factors can affect production and productivity in the domestic economy: • International trade and finance, which may be related to geography, but is primarily influenced by government policy • Population growth 50 International trade and finance By liberalizing trade, governments expand markets and lower prices, so that institutions and individuals can produce items that they are relatively productive at, earn more, save more and consume more. • Benefits of comparative advantage with limited resources: a country should concentrate on relatively competitive industries • while relying on foreigners to produce in other industries. • Trade also allows more competition and exposure to new ideas. • Monopolies flourish and ideas/products stagnate when trade is restricted. • Unemployment is primarily influenced by monetary policy, not trade policy. • International finance can allow domestic companies to raise more funds from international investors. But evidence about trade is mixed, because other factors might be more important in explaining (the lack of) economic growth: 51 International trade and finance Openness to trade and the growth rate of real GDP per person, 1950*-2009 Exports + imports relative to total expenditure on domestic products (GDP) (left axis) Growth rate of real GDP per person (right axis) 120% 6% Brazil Japan US Singapore (1960) India 0% China (1952) 0% Spain 1% Mexico 20% Australia 2% Korea (1953) 40% UK 3% Canada 60% Rwanda (1960) 4% Mali (1960) 80% Philippines 5% percent 100% percent to 312% *or other years, as indicated. Source: Source: Alan Heston, Robert Summers and Bettina Aten, http://pwt.econ.upenn.edu/php_site/ 52 Population growth Population growth can influence economic growth in the following ways: 1. It depletes natural resources for the average worker 2. It reduces physical capital and human capital for the average worker 3. It can improve technology and new ideas 4. It affects the ratio of young (productive) workers relative to old (retired) people 53 Population growth 1. It depletes natural resources. • 200 years ago, Thomas Malthus argued that population growth would deplete finite resources and strain economic growth. • Since then, the world population has increased by a factor of 7 but economies have continued to grow. • Mr. Malthus failed to account for creation of technological knowledge and new capital. • Mr. Malthus’ argument might also be applied to water and to energy, • but these industries also can become more productive from new technologies. 54 Population growth 2. It reduces physical capital and human capital available for the average worker • A larger population less physical capital and fewer education resources for the average person 3. It can improve technology and new ideas • More people implies more scientists, inventors, engineers and other researchers, and therefore more technological knowledge and economic growth. 55 Population growth 4. It affects the ratio of young workers to retired people • Fewer than 2.1 children per couple on average can eventually strain retirement resources and limit care for the elderly. • Korea, Japan, China, Russia, Italy, Spain and other countries have populations with a growing amount old people and relatively few young workers. • Immigration can help, but is usually be politically unpopular. 56 Population growth Ways of controlling population growth include • Strictly enforced laws (China) • Education, availability and/or subsidization of contraception (condoms, IUDs, hormones,…) • Education and employment opportunities for girls and women to provide alternatives to and to raise opportunity cost of having babies. • In addition to affecting population, this should also increase productivity of the labor force. 57 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 live births per woman Population growth Nations with the 10 highest fertility rates, 2013 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Nigeria Gambia Uganda Burundi Source: World Bank, http://databank.worldbank.org/data/ Congo, Dem. Rep. Angola Chad Mali Somalia Niger 58 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 live births per woman Population growth Fertility rates of selected populous countries, 1960-2013 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Korea Poland Spain Germany Italy Japan United States China Russia Brazil India Indonesia Source: World Bank, http://databank.worldbank.org/data/ 59 0.0 Source: World Bank, http://databank.worldbank.org/data/ Somalia Angola Uganda Burkina Faso Malawi Senegal Cote d'Ivoire Congo, Rep. Liberia Mauritania Comoros Sudan Eritrea Samoa Rwanda Gabon Kiribati Tajikistan Swaziland Djibouti Kyrgyz Republic Israel Syria Oman Mongolia South Asia Guyana Morocco Indonesia Panama Guam South Africa Cabo Verde Nicaragua Mexico Myanmar Grenada Antigua and Barbuda French Polynesia Turkey Ireland St. Vincent Malaysia Australia Sweden United States Georgia Brazil Belgium Albania Denmark Russia Montenegro Cuba Lithuania Estonia Thailand Liechtenstein Bulgaria Moldova Czech Republic Austria Italy Hungary Greece Macao Hong Kong live births per woman Population growth Fertility rates of 200 nations and the world, 2013 8.0 200 nations world 7.0 6.0 5.0 4.0 3.0 2.0 1.0 60 Summary 1. Real GDP per person varies substantially around the world and has varied substantially through time. • The average income of the world’s richest countries is more than ten times that in the world’s poorest countries. 2. The standard of living in an economy depends on the economy’s ability to produce goods and services: its productivity. 3. Productivity depends on the amounts of physical capital, human capital, natural resources and technological knowledge available to workers. 4. The accumulation of capital is subject to diminishing marginal productivity. 5. Countries with high amounts of capital are predicted to grow more slowly than those that are building their capital stock from low levels when other factors are constant. 61 Summary 6. Governments can encourage growth in the capital stock by promoting domestic saving and investment and foreign investment. 7. Governments can encourage growth in human capital by subsidizing education and training. 8. Governments can encourage growth in technological knowledge by subsidizing research and development and through the patent system. 9. Governments can encourage growth in the capital stock, human capital and technological knowledge by protecting property rights and enforcing the rule of law. 10. Governments can encourage growth by liberalizing international trade and finance. 62 Summary 11. Population growth affects a nation’s productivity and production per person. 63