Production and Growth

Production and GrowthA country’s standard of living depends on its ability to produce goods and services. Within a country there are large changes in the standard of living over time.In the United States over the past century, average income as measured by real GDP per person has grown by about 2 percent per year.

Economic growth is the increase in the amount of the goods and services produced by an economy over time.

It is conventionally measured as the percent rate of increase in real GDP.

Economic growth

amount of labour increase labour productivity increase

Reasons of economics growth

Population growth Migration of workers Decrease of unemployment rate Increase of the number of working hours per

person Higher retirement age

Amount of labour increase

Productivity refers to the amount of goods and services produced for each hour of a worker’s time.

A nation’s standard of living is determined by the productivity of its workers.

Production and Growth

Economic Growth Around the World

Living standards, as measured by real GDP per person, vary significantly among nations.

Table 1 The Variety of Growth Experiences

Copyright©2004 South-Western

Annual growth rates that seem small become large when compounded for many years.

Compounding (compound interest ) refers to the accumulation of a growth rate over a period of time.

Compounding and the Rule of 70

Compounding and the Rule of 70

According to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately 70/x years.

$5,000 invested at 7 percent interest per year, will double in size in 10 years

70/ 7 = 10

An Example of the Rule of 70

i – interest ratek – number of years

Compound interest

GDPiGDP k 2)1(

Calculate in how many years time will GDP double it’s value if the interest rate is equal to 5%.

k = 14,2 so GDP will double it’s value after 15 years

Example 1

GDPGDP k 2%)51(

051

2k2k 051 ,ln

lnlog ,

Calculate the growth rate if GDP is to double in 10 years.

Interest rate must be equal to 7,2%

Example 2

GDPxGDP 2)1( 10

12x 10

Encourage saving and investment.Encourage investment from abroad

Encourage education and training.Establish secure property rights and maintain political stability.

Government Policies That Raise Productivity and Living Standards

Promote free trade.Promote research and development.

Government Policies That Raise Productivity and Living Standards

The Importance of Investment

There is definitely a link between investment today and growth in the future.

(a) Growth Rate 1960-1991 (b) Investment 1960-1991

South Korea

Singapore

Japan

IsraelCanada

Brazil

West Germany

MexicoUnited Kingdom

Nigeria

United States

IndiaBangladesh

Chile

Rwanda

Growth Rate (percent)0 1 2 3 4 5 6 7

South Korea

Singapore

Japan

IsraelCanada

Brazil

West Germany

MexicoUnited Kingdom

Nigeria

United States

IndiaBangladesh

Chile

Rwanda

Investment (percent of GDP)0 10 20 30 40

Growth and Investment

As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns.

Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while.

Thus small countries can grow faster than big countries.

The catch-up effect refers to the condition that, other things being equal, it is easier for a country to grow fast if it starts out relatively poor.

Once the country becomes richer, diminishing returns sets in.

Catch-up effect

For a country’s long-run growth, education is at least as important as investment in physical capital.◦ Human Capital In the United States, each year of schooling raises

a person’s wage on average by about 10 percent. Thus, one way the government can enhance the

standard of living is to provide schools.

Education

Trade is, in some ways, a type of technology.

A country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance.

Free Trade

The advance of technological knowledge has led to higher standards of living. Most technological advance comes from private

research by firms and individual inventors. Government can encourage the development of

new technologies through research grants and the patent system.

Research and Development

Gross domestic expenditure on research and development (GERD) includes expenditure on research and development by:◦ business enterprises, ◦ higher education institutions, ◦ government and private non-profit organizations.

Gross domestic expenditure on R & D (GERD)

GERD

http://windward.hawaii.edu/facstaff/briggs-p/Macroeconomics/macrolectures.htmCzarny Bogusław, Podstawy Ekonomii, PWE

2002www.wikipedia.org

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