Lecture macroeconomics chapter 2 1 production growth

Institute of International Education MACROECONOMIC IN THE LONG RUN Production and growth Saving, Investment & Financial system The Basic tools of Finance Unemployment 2 1 2 2 2 3 2 4 Institute of Inte[.]

Institute of International Education

MACROECONOMIC IN

THE LONG-RUN

Production and growth Saving, Investment & Financial system The Basic tools of Finance

Unemployment

2.1

2.2

2.3

2.4

2.1 Production and growth

▪ What are the facts about living standards and

growth rates around the world?

▪ Why does productivity matter for living

standards?

▪ What determines productivity and its growth rate?

▪ How can public policy affect growth and living

standards?

A typical family with all their possessions in the U.K., an advanced economy

2016:

GDP per capita:

$39,900

Life expectancy:

81 years

Adult literacy

99%

A typical family with all their possessions in Mexico, a middle income country

2016:

GDP per capita:

$8,200

Life expectancy:

77 years

Adult literacy:

A typical family with all their possessions in Mali,

a poor country

2016

GDP per capita:

$780

Life expectancy:

58 years

Adult literacy:

33%

Computing of economic growth: by % changes in real GDP

%

100 1

1 

−

=

−

−

t

t

t t

Y

Y

Y g

While

Economic Growth

Institute of International Education

Productivity

▪ Recall one of the Ten Principles from Chap 1:

A country’s standard of living depends

on its ability to produce goods & services.

▪ This ability depends on

productivity, the average quantity of goods & services produced per unit of labor input

▪ Y = real GDP = quantity of output produced

L = quantity of labor

so productivity = Y/L (output per worker)

Determinants of Productivity

– Physical capital

• Stock of equipment and structures

– Human capital

• Knowledge and skills that workers acquire through education, training, and experience

– Natural resources

• Nature, such as land, rivers, mineral deposits…

– Technological knowledge

• Knowing the best ways to produce

• Innovations or Steve Jobs’ “think different”

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Physical Capital Per Worker

▪ The stock of equipment and structures used to

produce goods & services is called [physical]

capital , denoted K

▪ K/L = capital per worker

▪ Productivity is higher when the average worker has more capital (machines, equipment, etc.)

Human Capital Per Worker

▪ Human capital (H):

the knowledge and skills workers acquire through education, training, and experience

▪ H/L = the average worker’s human capital

▪ Productivity is higher when the average worker has more human capital (education, skills, etc.)