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Chapter2 howToGetAstrongerGrowth

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An English economics lesson for French high school students : How to get a stronger economic growth ?

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Chapter2 howToGetAstrongerGrowth

  1. 1. The sources of the economic growth How to get a stronger growth ? Chapter 2 GurunES
  2. 2. The sources of the economic growth How to get a stronger growth ? Chapter Two a/ Using more factors of production b/ Increasing the labour productivity to get an intensive growth c/ getting growth with innovations d/ Accumulating capital (in different forms) to create a self-maintained growth e/ Particular importance of the institutions GurunES
  3. 3. a/ using more factors of production to get an extensive growth 3 Labor Natural resources Capital outputs (GDP) 3inputs The extensive growth is based on the expansion of the quantity of inputs in order to increase the quantity of outputs. GurunES
  4. 4. Test : What is the extensive growth ? the extensive growth is (several possible answers) ❏ based on the labor productivity ❏ based on the innovations ❏ based on the imports ❏ based on an increasing use of each factor of production GurunES
  5. 5. Test : What is the extensive growth ? the extensive growth is (several possible answers) ❏ based on the labor productivity ❏ based on the innovations ❏ based on the imports ❏ based on an increasing use of each factor of production GurunES
  6. 6. Name the 3 inputs (or 3 factors of production) 6 ? 3inputs ? ? GurunES
  7. 7. correction 7 Labor Natural resources Capital outputs (GDP) 3inputs The extensive growth is based on the expansion of the quantity of inputs in order to increase the quantity of outputs. GurunES
  8. 8. using more factors of production to get an extensive growth 88 Labor Natural resources Capital The extensive growth is based on the expansion of the quantity of inputs in order to increase the quantity of outputs. But the costs of production remain high and the ability to raise the quantity of inputs is limited. GurunES
  9. 9. b/ Increasing the labour productivity to get an intensive growth 99 The intensive growth is based on the increase of the labor productivity in order to increase the quantity of outputs and / or reduce the production costs. Labor Natural resources Capital capital - labor substitution → more capital-intensive output GurunES
  10. 10. increase of the labor productivity 10 Productivity can be improved by using technology that allows more to be done in less time. Productivity is an average measure of the efficiency of workers (labor factor) : quantity of labor input output productivity = 2 bookcases per employee productivity = 3 bookcases per employee increase of the labor productivity GurunES
  11. 11. Test : How to measure the productivity? Before the mechanisation, 10 000 employees were needed to build 25 000 cars. After the mechanisation, 8 000 employees produce 72 000 cars. Choose the right answer(s) : ❏ Before the mechanisation, 2.5 employees produced 1 car in average ❏ Before the mechanisation, 1 employee produced 2.5 cars in average ❏ After the mechanisation, each employee produce 9 cars in average ❏ After the mechanisation, each employee produce 12 cars in average ❏ The mechanisation creates productivity gains GurunES
  12. 12. Test : How to measure the productivity? Before the mechanisation, 10 000 employees were needed to build 25 000 cars. After the mechanisation, 8 000 employees produce 72 000 cars. Choose the right answer(s) : ❏ Before the mechanisation, 2.5 employees produced 1 car in average ❏ Before the mechanisation, 1 employee produced 2.5 cars in average ❏ After the mechanisation, each employee produce 9 cars in average ❏ After the mechanisation, each employee produce 12 cars in average ❏ The mechanisation creates productivity gains GurunES
  13. 13. Test : How to increase the labor productivity? Labor productivity may be increased by ❏ the capital-labor substitution ❏ increasing the number of workers by 25 % while production increases by 12% ❏ increasing the wages GurunES
  14. 14. Test : How to increase the labor productivity? Labor productivity may be increased by ❏ the capital-labor substitution ❏ increasing the number of workers by 25 % while production increases by 12% ❏ increasing the wages GurunES
  15. 15. Distribution of productivity gains thanks to the reduction of costs 15 lower prices higher profits higher wages higher purchase power More investment Increasing production (output) More consumption economic growth GurunES
  16. 16. Distribution of productivity gains thanks to the reduction of costs 16 lower _____ higher profits higher _______ higher purchase power More ________ Increasing ___________ (output) More __________ economic growth Fill the blanks ! GurunES
  17. 17. “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” Paul Krugman, The Age of Diminishing Expectations (1994) 17 comment on this quotation : GurunES
  18. 18. c/ getting growth with innovations 18 Actually, a great part of the economic growth rate comes from a general improvement in production, thanks to the technical progress. Nobody can really say which factor of production (labor or capital) is the main source of the growth… Actually, both together create the growth ! That’s why the Multi- factor productivity (MFP) is calculated. The so-called multi-factor productivity (MFP) measures the residual growth that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is often interpreted as the contribution to economic growth made by factors such as technical and organisational innovation. Multifactor productivity growth refers to the contribution of : ● technology, ● advances in knowledge, ● improvements in management, or production techniques GurunES
  19. 19. Getting growth with innovations : how the e-business upsets all the distribution circuit 19 technical innovation the distribution circuit is completely transformed (not only “improved”) Labor factor Capital factor deep impact on... the work organisation must be rethought Perfect inventory management and logistics skills rather than sales skills a super efficient transport system is needed a super efficient website rather than a corner shop drones self-drive cars New activities → new jobs → growth (+) BUT outdated activities and jobs are destroyed → growth (-) The Multi-Factor Productivity (MFP) increases GurunES
  20. 20. Getting growth with innovations : how Schumpeter describes it. 20 The "gale [storm] of creative destruction" describes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one". Find another example that might reflect this quotation. Build a reasoning from this example, with these economic words : ● labor factor ● capital factor ● productivity, multi-factor productivity (MFP) ● economic growth ● innovation GurunES
  21. 21. d/ Accumulating capital (in different forms) to create a self-maintained growth All depends on the ability of accumulating capital in different forms : 21 GurunES Human capitalmanufactured capital natural capital social capitalfinancial capital the institutions that maintain / develop human capital in partnership with others : families, communities, businesses, trade unions, schools, and voluntary organisations. people's health, knowledge, skills and motivation. All these things are needed for productive work. material goods or fixed assets which contribute to the production process rather than being the output itself – e.g. tools, machines and buildings. It is enabling the other types of Capital to be owned and traded. It has no real value itself but is representative of natural, human, social or manufactured capital; e.g. shares, bonds or banknotes. any stock or flow of energy and material that produces goods and services. It includes resources : renewable and non-renewable materials positive externalities self-maintained growth
  22. 22. d/ Accumulating capital (in different forms) to create a self-maintained growth All depends on the ability of accumulating capital in different forms : but what is what ?! 22 GurunES Human capitalmanufactured capital natural capital social capitalfinancial capital
  23. 23. d/ Accumulating capital (in different forms) to create a self-maintained growth 23 GurunES Human capital manufactured capital natural capital social capital financial capital Accumulating different types of capital create number of positive externalities education knowledge health government effectiveness absence of violence democracy public infrastructure political stability breathing air drinkable water innovationssavingsincomes goods machines wifi laws increase of Multi-Factor productivity
  24. 24. e/ Particular importance of the institutions A patent of invention is an intellectual property right. It is a rule , guaranteed by the institutions, that protects your invention or your artistic creation. Without such a rule, anybody could copy your invention and the copycat corporations could sell the same product at lower prices, since they don’t need to finance the investments in research you have to finance ! Without this rule, no more trade ! No more business ! No more growth ! 24 the tale of patents of inventions and the copycats GurunES
  25. 25. e/ Particular importance of the institutions 25 Comment on these graphics. What economic problem does it illustrate ? http://www.musicbusinessworldwide.com/downloads-have-falle n-24-in-the-past-year-in-the-us-market/ GurunES
  26. 26. key things to memorize 26 parts of this chapter key things to memorise a/ Using more factors of production 3 production factors : labor / natural resources / capital used to produce an output More factors → more output = extensive growth But there are limits : natural resources are not extensive, neither the labor factor. b/ Increasing the labour productivity to get an intensive growth The labor productivity measures the efficiency of workers. Improving the labor productivity → reduction of costs → ● lower prices and higher wages → higher purchase → more consumption ● higher profit → more investment → more production More consumption and more production mean more economic growth. c/ getting growth with innovations Actually the economic growth is based on the productivity of a mix of capital and labor factors as a result of innovations. It is better measured by the MFP (MultiFactors Productivity). Example of the numerous consequences of the e-business on the economic growth. d/ Accumulating capital (in different forms) to create a self-maintained growth Nowadays no more labor factor and capital factor : we just speak about 5 types of capital (as a wealth) : human capital, manufactured capital, natural capital, social capital, financial capital. Accumulating these 5 types of capital creates a self maintained growth. e/ Particular importance of the institutions the economy needs rules in order to encourage capital owners to accumulate more capitals. Example of illegal music and video downloading. GurunES
  27. 27. The sources of the economic growth p27 end of How to get a stronger economic growth ? chapter 2 GurunES

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