Chapter 12: Production and Growth

Key Themes

• Measurement of wealth and standard of living across different societies.
• Importance of GDP per capita as a measure of economic health.
• Correlation between GDP per capita and other indicators such as infant mortality and education enrollment.

Case Studies

United Kingdom (Advanced Economy)

• GDP per capita: ~$36,000
• Infant mortality rate: 5%
• High school enrollment: 98%

Mexico (Middle-Income Country)

• GDP per capita: ~$15,390
• Infant mortality rate: 1.6%
• High school enrollment: 71%

Mali (Poor Country)

• GDP per capita: ~$1,000
• Infant mortality rate: 17.6%
• High school enrollment: 31%

Economic Growth Variations

• Major differences in growth rates among countries.
• Example of China’s rapid growth despite initially low GDP per capita.
• Historical context: Countries can shift from poor to wealthier status through sustained growth.

Productivity and Its Determinants

Definition of Productivity

• Productivity = Output per worker = Real GDP / Quantity of Labor.
• High productivity correlates with higher living standards.

Factors Affecting Productivity

1. Physical Capital per Worker (K/L)

   • Stock of equipment and structures used for production.
   • Example: Robinson Crusoe's fishing rod improves his fish-catching efficiency.

2. Human Capital per Worker (H/L)

   • Knowledge and skills gained through education and training.
   • Example: Education in fishing techniques increases Robinson's productivity.

3. Natural Resources per Worker (N/L)

   • Inputs provided by nature.
   • Example: Availability of fish around Robinson's island increases productivity.

4. Technological Knowledge (A)

   • Society's understanding of production processes.
   • Example: Inventions like better fishing lures enhance productivity.

Role of Technology in Economic Growth

• Technology acts as a multiplier for outputs in production functions.
• Constant returns to scale: Changes in inputs lead to proportional changes in output.

Public Policies Impacting Growth

1. Investment and Savings

   • Encouragement of savings leads to increased physical capital.
   • Trade-off between current consumption and future investment.

2. Education and Health

   • Investment in education raises human capital.
   • Health care improvements lead to a more productive workforce.

3. Property Rights and Political Stability

   • Secure property rights encourage investment.
   • Stability promotes a favorable environment for economic growth.

4. Free Trade

   • Promotes efficiency and productivity.
   • Countries that embrace free trade tend to have higher growth rates.

5. Research and Development (R&D)

   • Government support for R&D stimulates technological advancements.
   • Knowledge as a public good increases productivity across society.

Population Growth Effects

• Population growth can strain natural resources but also increase potential workforce.
• Historical perspective: Technological advancements can offset resource strains.
• Policies to manage population growth can improve living standards.

Conclusion

• Significant disparities in living standards exist globally, influenced by productivity.
• Productivity depends on physical and human capital, natural resources, and technological knowledge.
• Effective public policies can stimulate growth and improve living standards in both poor and rich nations.