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1、?2007 Thomson South-Western,Production and Growth,A 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 p
2、erson has grown by about 2 percent,per year.,Production and Growth,Productivity,refers to,the amount of goods,and services,produced from each,unit of labor input.,A nation,s standard,of living is,determined largely,by the productivity of,its workers.,Table 1 The Variety of,Growth Experiences,ECONOMI
3、C GROWTH,AROUND THE WORLD,Living standards,as measured by real,GDP per person,vary significantly,among nations.,The poorest countries have average levels,of income that have not been seen in the,United States for many decades.,Annual growth rates that seem small,become large when compounded for,many
4、 years.,Compounding refers to the accumulation,Productivity:Its Role and,Determinants,Why Productivity Is So Important,Productivity,plays a key role in determining,living standards for all nations in the world.,To understand the large differences in living,standards across countries,we must focus on
5、,the production of goods and services.,How Productivity Is,Determined,The inputs used to produce goods and,services are called the factors of,production.,The factors of production include:,Physical capital,Human capital,Natural resources,Technological knowledge,The factors of production directly,How
6、 Productivity Is,Determined,Physical capital,per worker is the stock,of equipment and structures that are used,to produce goods and services.,Physical capital includes:,Tools used to build or repair automobiles.,Tools used to build furniture.,Office buildings,schools,etc.,Physical capital is a produ
7、ced factor of,production.,It is an input into the production process that in the,past was an output from the production process.,How Productivity Is,Determined,Human capital,per worker is the,economist,s term for the knowledge and,skills that workers acquire through,education,training,and experience
8、.,Like physical capital,human capital,raises a nation,s ability to produce goods,and services.,How Productivity Is,Determined,Natural resources,are inputs used in,production that are provided by nature,such as land,rivers,and mineral deposits.,Renewable resources include trees and,forests.,Nonrenewa
9、ble resources include petroleum,and coal.,Natural resources can be important but,are not necessary for an economy to be,highly productive in producing goods and,How Productivity Is,Determined,Technological knowledge,includes,society,s understanding of the best ways,to produce goods and services.,Hum
10、an capital includes the resources,expended transmitting this understanding,to the labor force.,FYI:The Production,Function,Economists often use a production,function to describe the relationship,between the quantity of inputs used in,production and the quantity of output,from production.,FYI:The Pro
11、duction,Function,Y,=,A F,(,L,K,H,N,),Y,=quantity of output,A,=available production technology,L,=quantity of labor,K,=quantity of physical capital,H,=quantity of human capital,N,=quantity of natural resources,F,()is a function that shows how the inputs,are combined.,FYI:The Production,Function,A pro
12、duction function has constant,returns to scale if,for any positive,number,x,xY,=,A F,(,xL,xK,xH,xN,),That is,a doubling of all inputs causes the,amount of output to double as well.,FYI:The Production,Function,Production functions with constant,returns to scale have an interesting,implication.,Settin
13、g,x,=1/,L,Y,/,L,=,A F,(1,K,/,L,H,/,L,N,/,L,),Where:,Y,/,L,=output per worker,K,/,L,=physical capital per worker,H,/,L,=human capital per worker,N,/,L,=natural resources per worker,FYI:The Production,Function,The preceding equation says that,productivity(,Y,/,L,)depends on:,physical capital per worke
14、r(,K,/,L,),human capital per worker(,H,/,L,),and natural resources per worker(,N,/,L,),as well as the state of technology(,A,).,ECONOMIC GROWTH,AND PUBLIC POLICY,Government policies that raise,productivity and living standards,Encourage saving and investment.,Encourage investment from abroad.,Encour
15、age education and training.,Establish secure property rights and maintain,political stability.,Promote free trade.,Promote research and development.,Saving and Investment,One way to raise future productivity is to,invest more current resources in the,production of capital.,Diminishing Returns and,th
16、e Catch-Up Effect,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.,In the long run,the higher saving rat
17、e,leads to a higher level of productivity and,Illustrating the Production,Function,Output,per worker,1,1,Capital per,worker,1.When the economy has a low level of capital,an,extra unit of capital leads to a large increase in output.,2.When the economy has a,high level of capital,an,extra unit of capi
18、tal leads to,a small increase in output.,Diminishing Returns and,the Catch-Up Effect,The,catch-up effect,refers to the property,whereby countries that start off poor tend,to grow more rapidly than countries that,start off rich.,Investment from Abroad,Governments can increase capital,accumulation and
19、 long-term economic,growth by encouraging investment from,foreign sources.,Investment from abroad takes several,forms:,Foreign Direct Investment,Capital investment owned and operated by a,foreign entity.,Foreign Portfolio Investment,Education,For a country,s long-run growth,education is at least as
20、important as,investment in physical 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 and encourage the,population to take advantage of them.,Education,An ed
21、ucated person might generate new,ideas about how best to produce goods,and services,which in turn,might enter,society,s pool of knowledge and provide,an external benefit to others.,One problem facing some poor countries,is the,brain drain,the emigration of,many of the most highly educated,workers to
22、 rich countries.,Healthier workers are more productive.,Good investments in the health of the,population can lead to increase living,standards.,Countries can get caught in a vicious,cycle.,Health and Nutrition,People cannot,afford adequate,health care and,nutritious food.,People are poor,Property Ri
23、ghts and,Political Stability,Property rights refer to the ability of,people to exercise authority over the,resources they own.,An economy-wide respect for property,rights is an important prerequisite for the,price system to work.,It is necessary for investors to feel that,their investments are secur
24、e.,Free Trade,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,Some countries engage in.,.inward-orientated trade policies,avoiding interaction wi
25、th other countries.,.outward-orientated trade policies,encouraging interaction with other countries.,Research and Development,The advance of technological knowledge,has led to higher standards of living.,Most technological advance comes from,private research by firms and individual,inventors.,Govern
26、ment can encourage the,development of new technologies through,research grants,tax breaks,and the patent,system.,Population Growth,Economists and other social scientists,have long debated how population growth,affects a society.,Population growth interacts with other,factors of production:,Stretchin
27、g natural resources,Diluting the capital stock,Promoting technological progress,Economic prosperity,as measured by real GDP,per person,varies substantially around the,world.,The average income of the worlds richest,countries is more than ten times that in the,worlds poorest countries.,The standard o
28、f living in an economy depends on,the economys ability to produce goods and,services.,Productivity depends on the amounts of physical,capital,human capital,natural resources,and,technological knowledge available to workers.,Government policies can influence the,economys growth rate in many different ways.,The accumulation of capital is subject to,diminishing returns.,Because of diminishing returns,higher saving,leads to a higher growth for a period of time,but growth will eventually slow down.,Also because of diminishing returns,the return,to capital is especially high in poor countries.,
