CH 7 - Production and Growth

Question 1

growth rate

Answer 1

how rapidly real GDP per person grew in the typical year

Question 2

productivity

Answer 2

the quantity of goods and services that a worker can produce for each hour of work
-> A nation can enjoy a high standard of living only if it can produce a large quantity of goods and services

Question 3

Determinants of productivity

Answer 3

• Physical Capital (K) per Worker (K/L): stock of equipment and structures that are used to produce G&S (or just capital)
• Human Capital (H) per Worker: economist’s term for the knowledge and skills that workers acquire through education, training, and experience (includes accumulated lifelong skills) / effort people exert to gain more knowledge
• Natural Resources (N) per Worker: inputs into production that are provided by nature, such as land, rivers, and mineral deposits
• Technical Knowledge (A): the understanding of the best ways to produce goods and services / new ideas, products and processes for producing G&S (common and proprietary knowledge)

Question 4

difference between technological knowledge and human capital

Answer 4

TK refers to society’s understanding about how the world works. HC refers to the resources expended transmitting this understanding to the labour force. (ex. TK- textbooks, HC- time pop has dedicated to read them)

Question 5

Production Function

Answer 5

Y = AF(L,K,H,N)
Y - quantity of output, L - quantity of labour, K - quantity of physical capital, H -quantity of human capital, N - quantity of natural resources

Question 6

importance of saving

Answer 6

Capital is a produced factor of production => society can change the amount of capital it has (by producing more capital they can produce more G&S) => one way to raise future productivity is to invest more current resources in the production of capital
-> for society to invest more in capital, it must consume less and save more of its current income

Question 7

diminishing returns

Answer 7

As the stock of capital rises, the extra output produced from an additional unit of capital falls. In other words, when workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly.

Question 8

catch up effect

Answer 8

other things equal, it is easier for a country to grow fast if it starts out relatively poor.
-> workers lack tools = low productivity = small amounts of capital investment would substantially raise these workers’ productivity
-> workers in rich countries already have large amounts of capital to work with -> additional investment would have a relatively small effect on productivity

Question 9

FDI and FPI

Answer 9

FDI (foreign direct investment): capital investment that is owned and operated by a foreign entity

FPI (foreign portfolio investment): investment financed with foreign money but operated by domestic residents (ex. buying stocks)

Question 10

effects of foreign investment

Answer 10

-> GDP is income earned within a country but some of the income from the investment generates accrues to people who do not live in that country. As a result, foreign investment in that country raises the income of its citizens by less than it raises the production in the country (measured by GDP).
-> increases the economy’s stock of capital, leading to higher productivity and higher wages = one way for poor countries to learn the state-of-the-art technologies developed and used in richer countries

Question 11

World Bank

Answer 11

-> obtains funds from the world’s most advances countries and uses them to make loans to less-developed countries so they can invest in roads, sewer systems, schools, etc.

-> offers advice about how to use funds

-> set up after WW2 with IMF (International Monetary Fund)

Question 12

Importance of education

Answer 12

-> Canada - each year of schooling has historically raised a person’s wage on average by about 10 percent (gap even bigger in less-developed countries)
-> Human capital conveys positive externalities (the effect of one person’s actions on the well-being of a bystander) => return to schooling for society is even greater than the return for the individual

Question 13

Brain drain

Answer 13

emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living
-> If human capital does have positive externalities, then this brain drain makes those people left behind poorer than they otherwise would be
-> however, this benefits the rich/developed countries that welcome this labour / students

Question 14

does brain drain happen in developed countries

Answer 14

Yes, even countries like Canada see their workers leave for higher paying jobs in the US

Some suggest cutting taxes (to make incomes more comparable), others suggest improvements to Canada’s social programs as well as investments in better education and improved health care

Question 15

health and nutrition

Answer 15

-> improved gross nutrition accounts for roughly 30 percent of the growth of per capita income in Britain between 1790 and 1980
-> In developing nations, poor health and inadequate nutrition remain obstacles to higher productivity and improved living standards
-> Vicious circle -> Poor countries are poor in part because their populations are not healthy, and their populations are not healthy in part because they are poor and cannot afford adequate health care and nutrition

Question 16

property rights

Answer 16

the ability of people to exercise authority over the resources they own
-> if resources can be expected to be stolen, there is no incentive to work
-> enforced through the civil justice system

Question 17

political stability

Answer 17

In many countries, the system of justice does not work well = contracts are hard to enforce + fraud often goes unpunished
In more extreme cases, the government infringes on them = firms are expected to bribe powerful government officials. Such corruption impedes the coordinating power of markets. It also discourages domestic saving and investment from abroad.

Question 18

inward-oriented policies

Answer 18

aimed at raising productivity and living standards within the country by avoiding interaction with the rest of the world (protectionism)
-> used by very poor countries to try to achieve more rapid economic growth
-> higher tarrifs and trade restrictions
-> they need to produce everything themselves

Question 19

importance of research and development

Answer 19

-> primary reason that living standards are higher today than they were a century ago (phone, transistor, computer) => innovations have improved the ability to produce goods and services
-> most technological advance comes from private research by firms and individual inventors
-> however, there is also a public interest in promoting these efforts
Knowledge (to a large extent) is a public good, (everyone can freely use ideas once they enter society’s pool of knowledge)

Question 20

government and R&D

Answer 20

-> government has a role in encouraging the research and development of new technologies (especially for private companies where result is not always guaranteed – ex. pharmaceuticals)
-> The federal, provincial, and territorial governments also encourage advances in knowledge by offering tax breaks to firms that engage in research and development
-> also encourages research through the patent system

Question 21

what does a large population mean in terms of productivity

Answer 21

Large population = more workers to produce G&S (ex. China) BUT also more people to consume G&S
-> does not mean a higher standard of living for a typical citizen, but means higher output
-> both large and small nations are found at all levels of economic development

Question 22

how population growth interacts with the other factors of production

Answer 22

1 - Stretching Natural Resources
2 - Diluting the capital stock
3 - Promoting Technological Progress

Question 23

1 - Stretching Natural Resources

Answer 23

Malthus argued that an ever-increasing population would continually strain society’s ability to provide for itself. As a result, mankind was doomed to forever live in poverty.

However, growth in mankind’s ingenuity has offset the effects of a larger population. Pesticides, fertilizers, mechanized farm equipment, new crop varieties, and other technological advances that Malthus never imagined have allowed each farmer to feed ever-greater numbers of people. Even with more mouths to feed, fewer farmers are necessary because each farmer is so productive.

Question 24

2 - Diluting the capital stock

Answer 24

Theory: high population growth reduces GDP per worker because rapid growth in the number of workers forces the capital stock to be spread more thinly = when population growth is rapid, each worker is equipped with less capital
- smaller quantity of capital per worker leads to lower productivity and lower GDP per worker
- Most apparent in the case of human capital: countries with high pop. growth have large numbers of school-age children -> larger burden on the educational system -> low educational attainment
=> High population growth = harder to provide workers with the tools and skills they need to achieve high levels of productivity

Question 25

ways to reduce the rate of population growth

Answer 25

laws that regulate the number of children families may have (ex. China)

Incentives: equal treatment of women (give opportunities for education and a job – fewer children)

Question 26

3 - Promoting Technological Progress

Answer 26

Positive view: more people -> more scientists, inventors and engineers to contribute to technological advance which benefits everyone