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Chapter 12
Production and Growth
1
Outline
International comparisons of real GDP per capita
What is productivity, its determinants, and its
impact on economic growth
Link between productivity, economic growth and
a nation’s public policy
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Real GDP per capita and living standards
Country
Period
Japan
18901997
18701997
19001997
18701997
19001997
Canada
China
USA
India
Real GDP per person Real GDP per Growth rate
at beginning of
person at end Per year (%)
period (1997 Can $) of period
(1997 Can $)
1656
32392
2.82
2616
30261
1.95
789
4942
1.91
4413
39784
1.75
743
2699
1.34
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Living standards
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Productivity
Productivity is the amount of goods and services
produced from each hour of a worker’s time
Productivity determines the living standards of a nation
as the latter depends on the nation’s ability to produce
goods and services
Determinants of Productivity:
–
–
–
–
Physical capital
Human capital
Natural resources
Technological knowledge
Y=A F(L, K, H, N)
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Economic Growth and Public Policy
Can public policy raise productivity and living
standards?
Encourage Savings and Investment
– Recall that capital is a produced factor of production
– Tradeoff between capital investment and consumption
goods
– Correlation between growth and investment (reverse
causality?)
– Diminishing returns to capital
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Diminishing returns and the catch-up effect
Diminishing returns is the property whereby the extra benefit
from an extra unit of an input declines as the quantity of input
increases
In the production process, capital is subject to diminishing
returns
As a result of diminishing returns to capital:
– In the LR, higher savings leads to greater accumulation of capital and
therefore higher level of productivity and income BUT not to higher
growth in productivity and income
– Catch-up effect is the property whereby countries that start off poor
tend to grow more rapidly than countries that start off rich
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Economic Growth and Public Policy (contd)
Investment from abroad
– FDI
– Foreign portfolio investment
– Foreign investment raises GNP (income) less than it raises GDP
(production)
– Source of state-of -the-art technologies
Education- investment in human capital
– Positive externalities
– Opportunity cost of schooling is higher in poor countries
– Brain-drain- negative externality
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Economic Growth and Public Policy (contd)
Property rights and political stability
– Coordination of economic activities through market prices
– Corruption impedes coordinating power of markets
– Discourages domestic savings and foreign investment
Free trade
– Infant- industry argument
– Small size of the economy
– Landlocked countries
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Economic Growth and Public Policy (contd)
Control of population growth
–
–
–
–
Population growth reduces GDP per capita
Huge burden on education system
Malthus theory on population growth
Raising opportunity cost of additional children
Research and Development
– Knowledge is a public good
– Tax breaks and patent system encourages R and D
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Economic Growth and Public Policy (contd)
Cross-country growth studies show that per capita
growth is related to :
–
–
–
–
Initial income level of the country
Geographic and resource structure of the country
Market orientation of the economy
National saving rate
Is productivity slowdown in industrialized
countries a result of slow technological progress?
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