Chapter 12 Flashcards
Growth factors
1) savings and investments
2) foreign investments
3) education
4) Health and nutrition
5) property rights and political stability
6) free-trade
7) research and development
8) population growth
Productivity
The amount of goods and services produced for each hour of labor input
why living standards vary so much around the world
Productivity, Living standards, and growth
Productivity is the key determinant of living standards and that growth in productivity is the key determinant of growth in living standards
Determinants of productivity
Physical capital
Human capital
Natural resources
Technological knowledge
Physical capital
The stock of equipment and structures used to produce goods and services
*Capital is a produced factor of production
Human capital
The knowledge and skills that workers acquire through education, training, and experience
Natural resources
Inputs into production that are provided by nature
renewable and nonrenewable
Technological knowledge
The understanding of the best ways to produce goods and services
The production function
Describes the relationship between the quantity of inputs used in production and the quantity of output from production
Y = AF(L, K, H, N),
Saving and investment
When a country saves a large portion of its GDP, more resources are available for investment in capital, and higher capital raises a country’s productivity and living standard
Diminishing returns
As the stock of capital rises, the extra output produced from an additional unit of capital falls
Catch up effect
It is easier for a country to grow fast if it starts out relatively poor [because small amounts of capital investment can substantially raise worker productivity]
Foreign direct investment
A capital investment that is owned and operated by a foreign entity
Ex: Ford motor company building a car factory in Mexico
Foreign portfolio investment
An investment that is financed with foreign money but operated by domestic residents
Ex: an American buying stock in a Mexican corporation which uses the money to build a new factory
Education
Governments can enhance the standard of living by providing good schools. Human capital conveys positive externalities
Health and nutrition
Healthier workers are more productive
Policies that lead to more rapid economic growth naturally improve health outcomes, which in turn would further promote economic growth
Property rights and political stability
Policymakers can foster economic growth by protecting property rights and promoting political stability
Political instability is a threat to property rights (ability of people to exercise authority over the resources they own)
Inward oriented policies
Attempting to increase productivity and living standards within a country by avoiding interaction with the rest of the world
Outward oriented policies
Attempting to increase productivity and living standards within a country by participating in international trade
Free-trade
Countries that eliminate trade restrictions experience the same kind of economic growth that would occur after a major technological advance
Geography is a factor in international trade (landlocked countries find trade more difficult and have a lower standard of living)
Research and development
There is a public interest in promoting efforts towards technological advances and research because knowledge is a public good
Population growth
A larger population means more workers to produce goods and services
However, high population growth reduces GDP/worker because rapid growth in # workers forces the capital stock to be spread more thinly
Best measure of living standards
GDP per capita (based on productivity)
