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# Growth and productivity

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• A positive change in the level of production of goods and services by a country over a certain period of time.
• The only reason to have money, in Say&apos;s view, is to buy products.
• A resource in one time period may not be a resource in another.
• ### Growth and productivity

1. 1. GROWTH AND PRODUCTIVITY Chapter 11
2. 2. <ul><li>Growth - is a rise in amount of goods and services an economy produces. </li></ul><ul><li>Productivity - an output per unit of input </li></ul><ul><li>what is produced : what is required to produce </li></ul>
3. 3. <ul><li>Say`s law : Supply creates its own demand , named after a French Economist, Jean Baptiste Say . </li></ul><ul><li>Say`s law justification is as follows : </li></ul><ul><li>People work and supply goods to the market because they want other goods. </li></ul>
4. 4. Rule of 72 <ul><li>Divide 72 by the annual growth rate of income or any variable to get the number of years over which income or any variable will double. </li></ul>
5. 5. Example <ul><li>If you have \$100 in the bank and you're earning 5% interest, you will have \$200 in about 72/5 = 14.4 years. </li></ul><ul><li>If the population in the Philippines grows at 3%, it will double in 72/3 = 24 years. </li></ul><ul><li>If you have a savings account with a principal of \$1,000 and an interest rate of 6%, your savings will grow to \$2,000 in about 72/6 = 12 years. </li></ul>
6. 6. Specialization: <ul><li>The concentration of individuals on specific detail of production, and division of labor, the cleavage of a task to allow for specialization of function. </li></ul>
7. 7. Comparative advantage: <ul><li>The ability to be better convenient to the production of one good than to the production of another good. </li></ul>
8. 8. <ul><li>Per capita growth : producing more goods and services per person </li></ul><ul><li>Per capita growth = % change in output - % change in population </li></ul><ul><li>0 = 50% - 50% </li></ul>
9. 9. Sources of Growth <ul><li>Investment and accumulated capital </li></ul><ul><li>Available resources </li></ul><ul><li>Compatible institutions </li></ul><ul><li>Technological growth </li></ul><ul><li>Entrepreneurship </li></ul>
10. 10. 1. Investment and Accumulated Capital: <ul><ul><li>Physical capital accumulation and investment were once seen as the key elements to growth. This is not longer thought to be true because: </li></ul></ul><ul><ul><ul><li>-The empirical evidence does not support it. </li></ul></ul></ul><ul><ul><ul><li>-Products and processes change. </li></ul></ul></ul><ul><ul><ul><li>-Capital is far more than machines. </li></ul></ul></ul>
11. 11. 1. Investment and Accumulated Capital: <ul><li>Human Capital : the skills that are associated in workers through people`s knowledge. </li></ul><ul><li>Social Capital : the establishment way of doing things that directs people in how they approach production. </li></ul>
12. 12. 2. Available Resources <ul><ul><li>Nations with an abundance of one type can trade for more of another type if needed. </li></ul></ul><ul><ul><li>Technology can create new resources and displace others (e.g. Solar or hydrogen power might replace gasoline as the fuel of choice in cars, trucks, busses.) </li></ul></ul>
13. 13. 3. Compatible Institutions: <ul><ul><li>Those that foster growth—must have incentives built into them that lead people to work hard and discourage people from activities that inhibit growth. </li></ul></ul><ul><ul><li>Private ownership of property plays an important role in growth. </li></ul></ul><ul><ul><li>A corporation is another example of a growth-promoting economic institution because of limited liability. </li></ul></ul><ul><ul><li>Many developing nations have merchantist policies dictating governmental permission before economic activity can take place. </li></ul></ul>
14. 14. 4. Technological growth <ul><ul><li>A much larger aspect of growth involves changes in technology—changes in the goods we buy and changes in the way we make goods. </li></ul></ul>
15. 15. 5. Entrepreneurship <ul><li>Consist of competitive behaviours that drive the market process </li></ul><ul><li>Serves as agents of change, bring new ideas to the market and stimulate growth </li></ul>
16. 16. Theories of Growth <ul><li>Production function : Shifts the relationship between the quantity of inputs used in production and the quantity of output resulting from production. </li></ul>
17. 17. <ul><li>Constant returns to scale : output will increase in due proportion as all inputs </li></ul><ul><li>Increasing returns to scale : output increases by a greater proportionate rise than all inputs. </li></ul><ul><li>Decreasing returns to scale : output increases by a smaller proportionate as all inputs. </li></ul>
18. 18. The Law of Diminishing Marginal Productivity: <ul><li>Rising one input, keeping all others constant, will bring about smaller and smaller gains. </li></ul>
19. 19. The Classical Growth Model <ul><li>Classical growth model: a model of growth that uses all efforts in the role of capital accumulation in the growth process. </li></ul>
20. 20. Focus on Diminishing Marginal Productivity of Labor <ul><li>The Classical growth model focused on how diminishing marginal productivity of labor placed limitations on growth. </li></ul><ul><li>Economists such as Thomas Malthus said that since land was fixed, diminishing marginal productivity would set in as population grew. </li></ul><ul><li>As output per person declines, at some point available output would no longer be sufficient to feed the population. </li></ul>
21. 21. Diminishing Marginal Productivity of Capital <ul><li>Increases in technology and capital overwhelmed the law of diminishing marginal productivity. </li></ul><ul><li>Modern economists, such as Robert Solow, changed the focus to the diminishing marginal productivity of capital, not labour. </li></ul><ul><li>They assumed population grows at a constant rate. </li></ul>
22. 22. Technology <ul><li>Technology overwhelms diminishing marginal productivity so that growth rates can increase over time. </li></ul><ul><li>Technology is the result of investment in creating technology (research and development). </li></ul><ul><li>Investment in technology increases the technological stock of an economy. </li></ul>
23. 23. The New Growth Theory <ul><li>Emphasizes the role of technology rather than capital in the growth process. </li></ul><ul><li>New Growth Theory separates investment in capital and investment in technology. </li></ul>
24. 24. Technology <ul><li>Increases in technology are not as directly linked to investment as is capital. </li></ul><ul><li>Technological advances in one sector of the economy lead to advances in completely different sectors. </li></ul><ul><li>Technological advances have positive externalities or positive effects on others not taken into account by the decision maker. </li></ul><ul><li>Some basic research is protected by patents or the legal ownership of a technological innovation that gives the owner of the patent sole rights to its use and distribution for a limited time. </li></ul>
25. 25. Learning by Doing <ul><li>New growth theory also highlights learning by doing which is improving the methods of production through experience. </li></ul><ul><li>By increasing the productivity of workers, learning by doing overcomes the law of diminishing marginal productivity. </li></ul>
26. 26. Economic Politics to Embolden Per Capita Growth <ul><li>Policies embolden saving and investment </li></ul><ul><li>Policies to control population expansion </li></ul><ul><li>Policies to build up the level of education </li></ul><ul><li>Policies to technologically innovate </li></ul><ul><li>Policies to provide funding for research </li></ul><ul><li>Policies to maximize the economy`s openness to trade </li></ul>
27. 27. Policies to Embolden Saving and Investment <ul><li>Modern growth theories have downplayed the importance of capital in the growth process. </li></ul><ul><li>Policy makers are eager to encourage both saving and investment. </li></ul><ul><li>Canada has used tax incentives to increase saving. </li></ul>
28. 28. Policies to Control Population Growth <ul><li>Developing nations whose populations are rapidly growing have difficulty providing enough capital and education for everyone </li></ul><ul><li>Policies that reduce population growth include: </li></ul><ul><li>Free family–planning services. </li></ul><ul><li>Increased availability of contraceptives. </li></ul><ul><li>One-child-per-family policies, such as Chinaadopted in 1980. </li></ul>
29. 29. Policies to build up the level of education <ul><li>Increasing the educational level and skills of the workforce increases labor productivity. </li></ul><ul><li>In developing nations, the return on investments in education is much higher than in developed nations. </li></ul><ul><li>Technical training in improved farming methods or construction is more important than higher education in a developing country. </li></ul><ul><li>In Canada, it is estimated that an additional year of school increases a worker’s wages by an average of 10 percent. </li></ul>
30. 30. Policies to technologically innovate <ul><li>While all agree that technology is important, no one is sure what the best technological growth policies are. </li></ul><ul><li>Patents and protecting property rights are two ways to encourage innovation. </li></ul><ul><li>Well-developed financial institutions such as stock markets create liquidity and encourage investment. </li></ul>
31. 31. Policies to provide funding for research <ul><li>Individual firms have little incentive to do basic research because of technology’s “common knowledge” aspect. </li></ul><ul><li>This is why the Canadian government provides most of the funding for basic research in this country. </li></ul><ul><li>- Canada’s spending on research and development (R&D) lags other industrialized countries. </li></ul>
32. 32. Policies to Maximize the Economy’s Openness to Trade <ul><li>Free trade increases growth by broadening the market and by fostering competition. </li></ul><ul><li>In order to specialize, you need a large market. </li></ul><ul><li>Large markets allow firms to take advantage of economies of scale. </li></ul>
33. 33. Presented by: <ul><li>Mariz Del Rio </li></ul><ul><li>Jung Seung Yoon(David) </li></ul><ul><li>Rhenrik Lim </li></ul><ul><li>Faith Estrada </li></ul>