Download Module 38: Productivity and Growth

Andrea Taylor
Aleks Tiefenbach
Lisa Altieri
Sue Kim
Eric Wilson
GDP per worker= T x (physical capital per
worker)^0.4 x (human capital per
worker)^0.6
Where T represents the estimate of the level of technology
assumed each year of education raised workers human capital
by 7%

Diminishing returns to physical capital- aggregate production
function exhibits this when holding the amount of human capital per
worker and the state of technology fixed, each successive increase in
the amount of physical capital per worker leads to a smaller increase
in productivity
 When the amount of human capital per worker and state of
technology are not affected/changed, every increase in the amount
of physical capital per worker drives productivity down
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A little bit of equipment makes a big difference in
productivity
ex: someone with a tractor will be more productive than
someone without one
All things fixed, more expensive the equipment, more
productive the worker
More physical capital per worker leads to more output per
worker
Physical capital per worker rises, output per worker rises but
at a DIMINISHING RATE
“other things equal”- additional amounts of physical capital
are less productive when amount of human capital per worker
and technology are the same
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Increase amount of human capital per worker
Improve technology
Both when amount of physical capital per worker is increased

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Growth accounting allows you to find how
much each a factor of production (human
capital, physical capital, technology) will
contribute to economic growth.
This is done to measure the effect of each
factor individually, and not as a whole.
To find the productivity growth caused by
an increase in physical capital, we would
assume two things:

•
•
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For every 1% increase in physical capital per
worker, productivity per worker increases by 0.33%
In this case, the amount of physical capital per
worker grows by 3%
By multiplying 3% and 0.33, we would find that
economic growth increased by 1% as a result of
increased physical capital per worker.
The effects of technological growth on an
economy are only taken into account after the
effects of human capital and physical capital
are found.

•
•
An improvement in
technology will
cause an upward
shift of the
production
function curve.
A movement along
the curve is caused
by an increase in
physical capital
(human capital is
fixed).
•
If between 1940
and 2010 physical
capital increased
from $20,000 to
$80,000 without
any technological
advancements, the
economy would
move from A to C
instead of A to D.
•
•
In this graph, it
took 70 years to
double real GDP by
adding physical
capital. Using the
Rule of 70, you’ll
find that the
growth rate is 1%
per year.
Rule of 70: Years to
double =
70/percent rate of
growth
•
Between points
A and D, real
GDP increases
from $30,000
to $120,000,
meaning that
the growth rate
is 2% per year.
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The advancements in technology will
contribute to total factor productivity, which
is the total amount an economy can produce
from a given amount of factor inputs.
When technology improves while the other
factors are constant, the economy produces
more without needing to change its other
factors.
For this reason, technological advancements
are considered crucial to a country’s
economic growth.

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Other things equal, countries that are abundant in valuable natural
resources, such as highly fertile land or rich mineral deposits, have
higher real GDP per capita than less fortunate countries.
◦ EX: Middle East’s oil deposits
…But other things are often not equal; in the modern world, natural
resources are a much less important determinant of productivity than
human or physical capital for the great majority of countries.
◦ EX: Japan has high real GDP per capita but very few natural resources
Historically, natural resources played a much more prominent role in
determining productivity.
◦ EX: In the 19th century, countries with highest real GDP were those
abundant in rich farmland and mineral deposits
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Thomas Malthus published “An Essay on the Principle of
Population” in 1798, which states that the fixed quantity of
land in the world is the basis of a pessimistic prediction
about future productivity.
Population grows  Amount of land per worker declines 
Other things equal, productivity falls.
He also believed technology could only aid productivity in the
short run.
His negative view was as so: the majority of people were
condemned to living on the edge of starvation, and only then
would death rates be high enough and birth rates low enough
to prevent rapid population growth from outstripping
productivity growth.
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Rates of long-run economic growth differ markedly around
the world.
In 1960, South Korea was a very poor country, but it
rebounded in the next few years: real GDP per capita grew
about 7% per year for more than 30 years.
It took the country only 35 years to achieve this growth that
required centuries elsewhere.
The “East Asian Phenomenon” refers to the high growth rates
that first appeared in South Korea, Taiwan, Hong Kong, and
Singapore and then spread across the region, most notably to
China.
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Asian countries achieved such high growth rates by having
very high savings rates that allowed for significant increase in
in the amount of physical capital per worker.
Very good basic education has also permitted rapid
improvement in human capital.
Some believe that East Asian economies experienced such
great growth because of their “backwardness” – or, as they
could move into the modern world, their ability to benefit
from adopting technological advances that had been
generated in technologically advanced countries (like the US).
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The East Asian experience demonstrates that economic
growth can be especially fast in countries that are playing
catch-up to other countries with higher GDP per capita.
Thus we have the convergence hypothesis, or the principle
that states that differences in real GDP per capita among
countries tend to narrow over time because countries that
start with lower real GDP per capita tend to have higher
growth rates.
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In 1900: Latin America had abundant natural
resources. They were not considered as the
economically backward region.
Why has Latin America stagnated?
◦
◦
◦
◦
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The rate of savings& investments was low
The basic education has been not emphasized enough
Political instability
Too much government intervention in the economy
Only Chile achieved the rapid growth
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Africa is very poor, and their living standard is not
even close to that of 200 years ago of U.S.
Problem of the political instability
◦ Since 1975, many of Africa countries had civil wars
◦ It made productive investment spending impossible
◦ Could not concentrate on the education

Problem of the property rights
◦ The lack of the safeguards- the corrupted government
often take away the property.

Health problem
◦ Diseases lowers the worker productivity
◦ A lot of tropical diseases can control by the public health
infrastructure
◦ The solution of health problem can also increase the attendance
to the school.

Although many believe that Africa is poor because Africa is
politically unstable, some believes Africa is politically
unstable because Africa is poor.
◦ Extremely unfavorable geographic condition

However, the economy of Africa is getting better since mid
1990s.
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Convergence hypothesis- relatively poor countries
should have higher rates of growth of real GDP per
capita than relatively rich countries
 The hypothesis
seems true among
the wealthy
countries.
 On the graph,
Japan has higher
rates of growth
than U.S.
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It does not work in the
relatively poor countries.
However, the convergence
hypothesis is not wrong
: it is true if other things are
all equal. However, the
other things (education,
law, etc) are not equal in
this world. That’s why the
hypothesis is not working
in the world as a whole.

a.
b.
c.
d.
e.
What two things does the aggregate production
function show productivity depends on?
Real GDP per worker and human capital per
worker
Physical capital per worker and human capital
per worker
Real GDP per worker and physical capital per
worker
Utilities per worker and output per worker
Human capital per worker and technology per
worker

a.
b.
c.
d.
e.
What is the aggregate production equation
T= technology
T*(PC)r*(HC)r
T*(PC)r*(RGDP)r
T*(HC)r*(RGDP)r
r*(PC)T*(HC)T
r*(PC)T *(RGDP)T

a.
b.
c.
d.
e.
When are additional amounts of physical capital
less productive?
When the government implements a price
ceiling
When physical capital exceeds the human
capital
When the government implements a price floor
When human capital per worker and the
technology are held fixed
always

a.
b.
c.
d.
e.
What is the convergence hypothesis?
International differences in physical capital tend
to narrow overtime.
International differences in physical capital tend
to widen over time.
International differences in real GDP tend to
narrow over time
International differences in real GDP tend to
widen over time.
Physical capital and real GDP tend to widen
overtime between international difference

a.
b.
c.
d.
e.
What is a good indicator to how rich a
country is?
Amount
Amount
Amount
Amount
Amount
of
of
of
of
of
physical capital per worker
human capital per worker
real GDP per worker
natural resources
technology
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B
A
D
C
D