Chapter 7 (Production and Growth) Flashcards
First, we examine international data on real
GDP per person
These data will give you some sense of how much the level and growth of living standards vary around the world.
Second, we examine the role of productivity—the amount of goods and services produced for each hour of a worker’s time
In particular, we see that a nation’s standard of living is determined by the productivity of its workers, and we consider the factors that determine a nation’s productivity
Third, we consider the link between
productivity and the economic policies that a nation pursues
The growth rate of 2.0 percent per year
ignores short-run fluctuations around the long-run trend and represents an average rate of growth for real GDP per person over many years
Explaining the large variation in living standards around the world is, in one sense, very easy.
As we will see, the explanation can be summarized in a single word—productivity. But, in another sense, the international variation is deeply puzzling.
If Crusoe is good at catching fish, growing vegetables, and making clothes, he lives well. If he is bad at doing these things, he lives poorly
Because Crusoe gets to consume only what he produces, his living standard is tied to his productivity
The term productivity refers to the
quantity of goods and services that a worker can produce for each hour of work.
If Crusoe finds a better place to catch fish, his productivity rises.
This increase in productivity makes Crusoe better off: He could eat the extra fish, or he could spend less time fishing and devote more time to making other goods he enjoys.
The reason why GDP can measure these two things simultaneously is that, for the economy as a whole, they must be equal.
Put simply, an economy’s income is the economy’s output
one of the ten principles of economics in Chapter 1 is that a country’s standard of living depends on
its ability to produce goods and services.
Crusoe will be better at catching fish, for instance, if he has more fishing poles, if he has been trained in the best fishing techniques, if his island has a plentiful fish supply, and if he invents a better fishing lure. Each of these determinants of Crusoe’s productivity
which we can call physical capital, human capital, natural resources, and technological knowledge—has a counterpart in more complex and realistic economies
The stock of equipment and structures that are used to produce goods and services is called
physical capital, or just capital
More tools allow
work to be done more quickly and more accurately.
the inputs used to produce goods and services—labor, capital, and so on—are called the factors of production
An important feature of capital is that it is a produced factor of production. in other words, it was the product previously made or made first
Human capital
is the economist’s term for the knowledge and skills that workers acquire through education, training, and experience
Natural resources
are inputs into production that are provided by nature, such as land, rivers, and mineral deposits. Natural
resources take two forms: renewable and nonrenewable
A forest is an example of
a renewable resource. When one tree is cut down, a seedling can be planted in its place to be harvested in the future.
Oil is an example of
a nonrenewable resource. Because oil is produced by nature over many thousands of years, there is only a limited supply. Once the supply of oil is depleted, it is impossible to create more.
A fourth determinant of productivity is
technological knowledge—the understanding of the best ways to produce goods and services.
Technological knowledge refers to society’s understanding about how the world works
Human capital refers to the resources expended transmitting this understanding to the labor force.
Despite the apparent appeal of such arguments, most economists are less concerned about such limits to growth than one might guess
They argue that technological progress often yields ways to avoid these limits. If we compare the economy today to the economy of the past, we see various ways in which the use of natural resources has improved.
The prices of most natural resources (adjusted for overall inflation) are stable or falling.
It appears that our ability to conserve these resources is growing more rapidly than their supplies are
dwindling. Market prices give no reason to believe that natural resources are a limit to economic growth.
