The document discusses productivity and economic growth. It begins by defining productivity as the efficient use of resources and measuring it as the ratio of total output to a specific input, such as labor. Productivity increases when there is more capital investment per worker (capital deepening) or technological improvements. Countries with higher levels of education, political stability, defined property rights, and greater investments in research and development tend to be more productive and have higher standards of living. While technological change may temporarily displace some workers, it ultimately benefits the economy by increasing productivity and the availability of affordable products.

1. Chapter 8
Productivity and Growth

2. Growth and the PPF
• What is the PPF again?
– Why is it importance?

3. Rank these 4 countries, richest to
poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
_________________________________________________________

4. Rank these 4 countries, richest to
poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B --
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
_________________________________________________________

5. Rank these 4 countries, richest to
poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B --
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
_________________________________________________________
Country C --
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)

6. Rank these 4 countries, richest to
poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B --
Size: About the size of California
Pop: 127 million +
Natural resources: few; fish
_________________________________________________________
Country C --
Country D --
Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger than Wash,
DC
Pop: 143 million
Pop: 4 million
Natural Resources: tons! Oil, natural
Natural Resources: not many, fish,
Gas, coal, timber (vast supplies)
deep water port
Results:

7. Rank these 4 countries, richest to
poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.

8. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
GDP/capita = $13,600
life expectancy = 76.9 yrs
literacy rate = 97.1 %

9. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
GDP/capita = $13,600
life expectancy = 76.9 yrs
literacy rate = 97.1 %
Country B --
Size: About the size of California
Pop: 127 million
Natural resources: few; fish

10. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
GDP/capita = $13,600
life expectancy = 76.9 yrs
literacy rate = 97.1 %
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $30,400
life expectancy = 81.15 yrs
literacy rate = 99%

11. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
_________________________________________________________
literacy rate = 97.1 %
literacy rate = 99%
Country C --
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)

12. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C -- Russia
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
GDP/capita = $10,700
life expectancy = 67.1 yrs
literacy rate = 99.6%

13. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C -- Russia
Country D --
Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger than Wash,
DC
Pop: 143 million
Pop: 4 million
Natural Resources: tons! Oil, natural
Natural Resources: not many
Gas, coal, timber (vast supplies)
deep water port
GDP/capita = $10,700
life expectancy = 67.1 yrs
literacy rate = 99.6%

14. Rank these 4 countries, richest to
poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C -- Russia
Country D -- Singapore
Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger than Wash,
DC
Pop: 143 million
Pop: 4 million
Natural Resources: tons! Oil, natural
Natural Resources: not many
Gas, coal, timber (vast supplies)
GDP/capita = $10,700
life expectancy = 67.1 yrs
literacy rate = 99.6%
GDP/capita = $29,700
life expectancy = 81.62 yrs
literacy rate = 92.5%

15. Bonus Nation
• Size: Twice the size of CA
• Population: very large, 130 million +
• Natural Resources: vast: oil, tin, iron ore, coal,
limestone, lead, zinc, natural gas

16. Bonus Nation
• Size: Twice the size of CA
• Population: very large, 130 million +
• Natural Resources: vast: oil, tin, iron ore, coal, limestone,
lead, zinc, natural gas
Nigeria:
• Per capital GDP: $1,400 2005
• Life Expectancy: 47.08 yrs
• Infant Mortality: 97.14 / 1000

18. What is Productivity?
 Production
– Process
– Transform resources
– Intro goods and services
 Productivity
– Efficient use of resources
– Ratio: Total output to specific input
– Labor productivity
• Output per unit of labor

19. Labor Productivity
• Why is this important?
• When does it increase?
• With human and physical capital

20. Per-Worker Production Function (PF)
• The PF shows the relationship between the
amount of capital per worker in the economy
and average output per worker.
• Capital deepening: an increase in the amount
of capital per worker
• One source of rising productivity
• Contributes to labor productivity and economic
growth

21. Exhibit 2
LO1
Output per worker
Per-Worker Production Function
PF
y
0
k
The per-worker production function,
PF, shows a direct relationship
between the amount of capital per
worker, k, and the output per
worker, y.
Capital per worker
The bowed shape of PF reflects the law of diminishing marginal returns from capital:
As more capital is added to a given number of workers, output per worker increases
but at a diminishing rate and eventually could turn negative.

22. Technological Change
 Technology
– Better quality of capital
– Increased productivity
– Upward rotation of PF
– Higher standard of living

23. LO1
Exhibit 3
Output per worker
Impact of a Technological Breakthrough
on the Per-Worker Production Function
PF’
y’
PF
y
0
k
Capital per worker
A technological breakthrough
increases output per worker at each
level of capital per worker.
Better technology makes workers
more productive.
This is shown by an upward rotation
of the per-worker production
function from PF to PF’.
An improvement in rules of the
game would have a similar effect.

24. Two Kinds of Change in Capital
Improve Worker Productivity
1) An increase in the QUANTITY of capital per
worker
– Movement along the per-worker production
function.
2) An improvement in the QUALITY of capital
per worker
– Reflected by technological changes that rotate
the PF

25. Rules of the Game
• The formal and informal institutions that
promote economic activities: laws, customs,
manners, etc.
• Stable political environment
• Well-define property rights

26. Freedom Index
http://www.fraserinstitute.org/research-news/displa
How do countries rate?
Does it make a difference in their Economic
Growth?
http://www.cato.org/pubs/efw/map/index.php

27. Productivity and Growth in
Practice
 Industrial market economies
– Higher standard of living
– 15% of world population
– Produce 75% of world’s output
 Developing countries
– Poor countries
– Low standard of living
– Less human and physical capital
– Low labor productivity

28. Education and Economic
Development
 Education
– Human capital
– Higher productivity
 Industrial market economies
– Higher education levels
 Developing countries
– Lower education levels

29. LO2
Exhibit 4
Percent of Adult Population with at Least a
College Education: 2003 and 2006

30. U.S. Labor Productivity
 Annual productivity growth
• 2.1% per year, since 1870 (by 1,680%)
• Over long periods
– Small differences in productivity
» Huge differences in standard of living
 1948-1973: Golden days; 2.9% per year
 1974-1982 Slowdown to 1%
– Oil pieces
– Legislation
 1983: rebound
– Information revolution

31. Exhibit 5
LO2
Long-Term Trend in U.S. Labor Productivity Growth: Annual
Average by Decade

32. LO2
Exhibit 6
U.S. Labor
Productivity
Growth
Slowed
During
1974-1982
and Then
Rebounded
The growth in labor productivity declined from 2.9% per year between 1948 and 1973 to only
1.0% between 1974 and 1982. A jump in the price of oil contributed to three recessions during
that stretch, and new environmental and workplace regulations, though necessary and beneficial,
slowed down productivity growth temporarily. The information revolution powered by the
computer chip and the Internet has boosted productivity in recent years.

33. How did computers boost
productivity?
1) Efficiency gains in the production of
computers and semiconductors
2) Greater computer use by industry

34. Output per Capita
 Standard of living
– Output per capita
– Real GDP per capita
 U.S.
– General upward trend
– During recessions
• Decrease in productivity

35. International Comparisons
https://www.cia.gov/library/publications/the-worldCompare Angola with the United States. What
is Angola’s GDP per capita, what about the
U.S.? Now what is their infant morality rates?
(meaning how many babies live to see their
first birthday).
Is their a quality of life difference?

36. Quality-of-Life Measures of
Development
• The GDP measures market transaction, it does
not measure differences in living standards.
– Demography
•
•
•
•
Life expectancy at birth
Infant mortality rate
Illiteracy rate
Per capita energy consumption
– Economic Freedom
• Freedom Index

37. Technological change
• Technological change
• Job dislocations can be created- displaced workers
• More affordable products, boosting both
production and employment
• “Does technological change lead to
unemployment?”
• NO statistical evidence of this.

38. Research & Development
 Basic research
 General search for knowledge
 First step for technological advancement
 Yields a higher return
to society
 Applied research
 Answer particular questions
 Develop specific products

39. Exhibit 10
LO
3
R&D Spending as a Percentage of GDP for Major
Economies during the 1980s, 1990s, and 2006

40. Industrial Policy
• Industrial policy
• The idea that government, using taxes, subsidies,
regulations, and coordination of private sector
could help nurture industries.
• Concerns
• Government efficiency
• Giveaway programs

41. Do Economies Converge?
• Convergence theory
• Developing countries- they can grow faster than
advanced economies
• Why?
• Adopt existing technologies
• Invest in human resources
• But, is it happening???