Economic Growth 10 - Efficiency Flashcards
How does our new definition of efficiency differ from our previous all encompassing definition?
Efficiency, here, is an umbrella concept used to capture anything that accounts for differences in productivity other than differences in technology.
Since we can’t measure efficiency directly, what’s the best way to study it?
By looking at it’s absence.
What is productivity determined by?
Productivity is determined by two things: technology, which represents the knowledge about how factors of production can be combined to produce output, and efficiency, which measures how effectively given technology and factors of production are actually used.
Which mathematical expression encompasses all of productivity?
A = T X E
where T is available technology and E is efficiency.
How does the story about the difference in the seeds used by Farmer A and Farmer B capture the difference between technology and efficiency?
The difference stemming from Farmer A’s workers throwing away part of the harvest illustrates the idea of efficiency. The technology of Farmer A is twice as good as that of Farmer B, but his production process is only half as efficient. As a result, the two farmers have the same level of productivity.
Suppose that India is G years behind the United States technologically. That is, the level of technology in India in 2009 was the same as the level of technology in the United States in the year 2009 – G. Which expression encompasses this difference?
T2009, India = T2009−G, US
Let g be the growth rate of technology in the United States.
How would this be expressed mathematically? How would we substitute this equation to get the technological level of India?
T2009,US = T2009−G,US × (1 + g)^G. Becomes T2009,US = T2009,India × (1 + g)^G Which in turn becomes T2009,India / T20019,US = (1+g)^-G
What is the function T2009,India / T20019,US = (1+g)^-G illustrating?
The ratio of technology in India to technology in the United States as a function of the gap in technology measured in years, G, and the growth rate of technology in the United States, g.
What’s an adequate way of summarizing the equation T2009,India / T20019,US = (1+g)^-G ?
A,India / A,US = (T,India / T,US) X (E,India / E,US)
What can we deduce from the equation A,India / A,US = (T,India / T,US) X (E,India / E,US) ?
The message from this exercise is that, unless lags in technology are extremely large, most of the difference in productivity between India and the United States must be the result of a difference in efficiency.
What is meant here by the break-even point?
The technology lag at which technology and efficiency would be equally important in determining the productivity gap between India and the United States.
Why does the former Soviet Union provide one of the best examples of low output as a result of inefficiency?
The Soviet economy was relatively good at accumulating factors of production. Despite its technology, the USSR was a disaster in terms of producing output. Because this dismal performance could not have been the result of deficiencies in technology or factor accumulation, it must have been the result of low efficiency.
Under central planning, government bureaucrats determined how labor, capital, and raw materials were allocated, what goods were produced, which firms supplied inputs to which other firms, and so on. In theory, such a centrally planned economy could produce output just as efficiently as, or even more efficiently than, a market economy.
What’s the first reason the Soviet Union fail miserably?
In practice, central planners did a poor job of fulfilling the roles that prices play in coordinating activity in a market economy, such as channeling productive inputs to the firms that value them most, giving firms an incentive to produce goods that are in high demand, and equalizing the quantities of each good that are supplied and demanded. As a result, shortages were rampant.
Under central planning, government bureaucrats determined how labor, capital, and raw materials were allocated, what goods were produced, which firms supplied inputs to which other firms, and so on. In theory, such a centrally planned economy could produce output just as efficiently as, or even more efficiently than, a market economy.
What’s the second reason the Soviet Union fail miserably?
The lack of incentives for managers and workers. Because firms had no owners seeking to maximize profits, managers of firms had no incentive to minimize their production costs, much less to implement new technologies that would raise productivity. Because so many goods were in short supply, firms similarly had no incentive to maintain the quality of their output—consumers would snap up whatever the firms produced. Plant managers had little leeway to fire unproductive workers or to reward those who did a good job, so absenteeism and on-the-job drunkenness were rampant.
What were the most important findings regarding the textile industry in 1910?
That differences in technology, in the sense of some countries using more advanced production methods than others, were almost completely irrelevant for explaining differences in wages. The reason was that the technology used in textile production in the countries studied was basically the same—indeed, most of the machines used in production were identical, having been manufactured in England and shipped throughout the world. Nor did differences in raw materials explain any of the differences in wages among countries.
Describe how the key factor seems to be the efficiency of the workers.
In countries in which workers tended more machinery, wages were higher. Workers in high-wage countries tended up to six times as much machinery as workers in low-wage countries. Equally surprising, the fact that workers in the richest countries tended more machines did not mean that machinery in these countries was any less productive, as one might have expected if poor countries were substituting labor for capital. Rather, the opposite was true: Each loom in the more-developed countries, though tended by fewer workers, produced more output.
Why were workers in rich countries able to tend so much more machinery? (Textiles 1910)
Differences in factors such as workers’ health and education do not seem to be the reason. Rather, differences in factory organization and in labor practices are evidently the main explanation. Workers in the poorer countries were capable of tending more machines, but something in the way the economy was organized prevented them from doing so.
Which interesting differences in relative productivity among industries have studies found?
The differences in productivity at the industry level were much larger than those in aggregate productivity.
In answering the question: “what was the source of these large differences in productivity among industries?” why does it seem unlikely that they were the result of differences in technology? (3)
Because the three countries considered are clearly at the frontier of world technology, and ideas flow easily among them. Also, that some of these productivity differences hold true even within a single company! Finally, in some cases, productivity was low in a country even though the country clearly had better technology than its rivals.
Give an example illustrating how differences in the organization of production among the countries is a better explanation for the productivity differences among industries?
Japanese automobile makers worked closely with their parts suppliers to streamline procedures and improve productivity. In Germany and the United States, by contrast, the relationship between automakers and their suppliers is more antagonistic. Suppliers fear that if they improve their productivity, the firms to which they sell their parts will simply negotiate lower purchase prices, and this reduces the incentive to become more efficient. Regarding the Japanese food-processing industry, the authors of the study blame low productivity on “a Byzantine network of regulation and custom that surround agriculture and distribution.”
Differences in productivity within a single industry are even visible within a single country. One such extensively studied industry is health care in the United States, which accounted for 18 percent of GDP in 2011. Elaborate.
There are enormous differences among regions in the United States in the quantity of medical care that individuals receive, with little or no corresponding difference in the health outcomes that result from this spending.
What did Atul Gawande attribute the differences in productivity between states in terms of health-care to?
Varying norms among the doctors in the two regions regarding how much the incentive of extra revenue from doing additional procedures should be allowed to influence the practice of medicine.
Why would the increase in the price of coal during the 1970s decrease efficiency?
Increased demand for coal made coal-mining companies highly profitable. The rise in profits in turn improved the bargaining position of the mine workers’ union because it raised the cost that the union could impose on firms by going on strike. The union took advantage of its improved bargaining position to change work rules so as to raise the level of employment—and thus lowered productivity.
What is featherbedding?
The sort of behavior in which employers are forced to hire more workers than are required for production.
What are the 5 main types of inefficiencies?
- Unproductive Activities
- Idle Resources
- Misallocation of Factors among Sectors
- Misallocation of Factors among Firms
- Technology Blocking
From society’s point of view, why do unproductive activities waste resources?
For society as a whole, the fewer resources that are used for production, the less will be produced, and the less will be available for consumption.
From the perspective of the individual, how could engaging in unproductive activities be beneficial?
People can earn more for themselves by engaging in unproductive activities than they could by producing
output because such an unproductive activity must necessarily involve some redistribution—that is, taking output away from others.
Why are many illegal activities considered unproductive?
In addition to wasting resources directly (in the case of burglary, using labor to break into houses rather than to produce output), such activities also require further nonproductive spending on the part of those who would rather not see their property taken away (e.g. hiring guards or installing alarm systems). In many countries, the costs of defenses against illegal appropriation are high.
What are examples of unproductive activities which are rampant in poor countries?
kidnapping for ransom, banditry, and even civil war, where the object of conflict is the right to exploit natural resources.
What is rent seeking?
Unproductive activities that involve the use of laws or government institutions to bring private benefits.
What is an economic rent?
An economic rent is a payment to a factor of production that is in excess of what is required to elicit the supply of that factor.
When does rent-seeking typically arise?
Rent seeking usually arises in cases where government policy creates an artificial or contrived rent, such as through licenses or protected monopolies.
