Production and Growth Flashcards
Productivity is
the quantity of goods and services produced from each unit of labour input.
Productivity = Y/L (where L is the quantity of labor)
What determines productivity
- Physical capital per worker
- Human capital per worker
- Natural resources per worker
- Technological resources
Why productivity is so important?
- When productivity grows rapidly, so do living standards
- An economy’s income is the economy’s output
- A nation can enjoy a high standard of living only if it can produce a large quantity of goods and services
K is a denoted version of
[physical] capital - the stock of equipment and structures used to produce goods and services
capital per worker can be calculated by
K/L
Productivity is higher when the average worker has more capital (machines, equipment, etc.). i.e., an increase in K/L causes an increase in Y/L
The difference between K (capital) and I (investment)
- Investment: including capital bought this year
- Capital Stock: including investment this year and previous years as well (all available capital)
H is a denoted version of
Human capital - the knowledge and skills workers acquire through effort (education, training, and experience)
The average worker’s human capital = H/L
H is a denoted version of
Human capital - the knowledge and skills workers acquire through efforts (education, training, and experience)
The average worker’s human capital = H/L
Productivity is higher when the average worker has more human capital - an increase in H/L causes and increase in Y/L
N is a denoted version of
Natural resources - the inputs into production that nature provides, e.g., land, mineral deposits
When other things equal, more N allows a country to produce more Y .
In per-worker terms, an increase in N/L causes an increase in Y/L.
Some countries are rich because they have abundant natural resources
But countries need not have much N to be rich (e.g., Japan imports the N it needs).
A is a denoted version of
Technological knowledge - society’s understanding of the best ways to produce goods & services
Any advance in knowledge that boosts productivity and allows society to get more output from its resources
Difference between A and H
- Technological knowledge refers to society’s understanding of how to produce goods & services.
- Human capital results from the effort people expend to acquire this knowledge.
- Both are important for productivity.
The production function is
- a graph or equation showing the relation between output and inputs
- Y= AF(L, K, H, N)
- F( ) is a function that shows how inouts are combined to produce output
- We don’t put A inside F( )
The production function has
the property constant returns to scale (CRS) - changing all inputs by the same percentage causes output to change by that percentage.
EX: 2Y = AF(2L, 2K, 2H, 2N)
EX: Y/L = AF(1, K/L, H/L, N/L)
What can government policy do to raise
productivity and living standards?
- Boost productivity by increasing K
- Producing more capital requires producing fewer consumption goods due to resource scarcity
- Trade-off: sacrifice current consumption to increase future consumption
- Reducing consumption = increasing saving
Diminishing Returns
- The government can implement policies that raise saving and investment. Then K will rise, causing productivity and living standards to rise.
- But as K rises, the extra output from an additional unit of K falls
The catch-up effect: Over 1960-1990, the U.S. and South Korea devoted a similar share of GDP to investment. However, growth rate was 6% in Korea and only 2% in the U.S.
Explanation: the catch-up effect. In 1960, K/L was far smaller in Korea than in the U.S., hence Korea grew faster.
