a glass and welcome to the next chapter we are now on chapter 12 chapter 12 is all about production and growth have you ever really wondered about different societies and how we measure their wealth and how we can improve our wealth our income our standard of living and how do we grow these economies so for instance taking it to example this huh nice little typical family living in the UK UK would be considered an advanced economy and they had taken all the possessions and they put them on their memo driveway wrote you can see they've got quite a bit of possessions they have a sailboat they have kitchen appliances they have a nice amount of um furniture the per capita GDP is in England is about 36 now granted obviously this is a few years ago the infant mortality rate is 5% in high school Rome is 98 percent now compare that to a typical family in Mexico this is all their possessions they are considered to be a middle-income country and this is a typical family few more children the GDP per capita is about fifteen thousand three hundred and ninety the infant mortality rate is one point six percent quite a bit higher than the UK and the high school enrollment is 71 percent now here's a poor country this is um Mali it's a poor country there is a family with all this possessions out nice house their per capita income is a little over a thousand dollars the infant mortality rate is seventeen point six percent and the high school enrollment is thirty one percent you're starting to see some correlations there aren't you the per capita GDP meaning you know the GDP per capita is seems to be related to many other indications of productivity such as enrollment in high school which would of course help them the labor force and education and the population the informality right so we're going to be looking at those over the course of this class in this particular chapter so in fact this vast difference in the standard of living across the world and incomes and growth around the world are very very different so if we were to look at the GDP per capita in 2012 for all major countries in the United in the world you'd see China's was really quite low compared of the seeking to Singapore's or Japan's or Spain's or the United States or Canada or New Zealand or Saudi Arabia but when you look at the growth rate between 1970 and 2012 you see that even though that per capita seems to be a low number relative they have grown immensely over that point of time whereas the United States who has a fairly high per capita only grew 1.8 and Canada right next to us is 1 point son so fact 2 there is a great variation in the growth across these countries and this growth across countries we're going to be looking at in terms of what variables and how does a country grow their GDP per capita so since growth rates vary and the countries rankings can change over times we can't assume that just because you're a poor country today you are necessarily doomed for poverty forever in Singapore incomes were very very low in 1960 and as we saw there are quite high now which countries can't take their status for granted they can be overtaken by poorer but faster growing countries so why have some countries richer than others why do some countries grow quickly while other countries seems stuck in this poverty trap what policies can help raise growth rates and long-run living sinners productivity is the key a country's standard of living depends on its ability to produce goods and services this ability depends on productivity and that's the average quantity of goods and services produce per unit of labour input so what are we talking about is the average quantity of goods and services produced which we've been measuring over the last two chapters when we're talking about ways of measuring goods and services per unit of labour so now we're trying to see how productive the country is for this labor so if we know that's real GDP which we have learned how to calculate and we know the quantity of labor how much labor there is available in the country we can figure out that country's productivity we can take why this real GDP and divide it by the output per worker and get the output per worker I'm sorry so Y divided by the quantity of Labor will give you productivity or the output per worker what we're trying to do is figure out for a society how productive each worker is output being the productivity this is how much they're making but we need to know how much is per worker otherwise the numbers would kind of lie wouldn't it because you could have a really high number but when you looked at it and you looked at uses population if your population of laborers was even higher then it would really not be that particularly good number would it so productivity why is it so important why do we care well we care because when a nation's workers are productive the real GDP is large and incomes are high when productivity grows rapidly so do living standards so what then is the determinate makes that GDP per labor grow and what affects it so over the course of looking at productivity we're going to look at the variables affected it affects it but we're also going to use an example of Robinson Crusoe because it's a nice simplistic example but it's a great one mr. Caruso is stranded on the diamonds he must catch his own fish he has to grow his own vegetables and he has to make his own clothes so let's see how Robinson's going to do that physical capital per worker is the first variable we're going to look at in terms of productivity and remember how we talked about physical capital is the stock of equipment and structures used to produce goods and services this is what we call physical capital or capital in economic terms we're talking about equipment and structures and inventories and we denote that as K physical capital K divided by L which we now know is what labor force gives us the capita per worker productivity is higher when the average worker has more capital they have more machines they have more equipment so an increase in capital per worker will cause an increase in productivity or Y divided by L which is productivity so let's look at Robinson Crusoe we only have one laborer don't we so in order for him to increase his K divided by L he needs to catch more fish per with a fishing rod why because what he has a fishing rod he will catch more fish otherwise how is he gonna catch those fish she's gonna have to use his hands any type of what physical capital equipment the Robinson Caruso uses will make him more efficient then he would have been otherwise so Robinson's Caruso's productivity will increased by the use of K a fishing rod or any other capital physical capital and because he's L is only Robinson Crusoe so he will increase the overall productivity of his little economy by having fishing rod so fishing rods in this particular case are physical capital per worker human capital per worker human capital H is the knowledge and skills that workers require through education training and experience if you take H and u divided by L you get the average workers human capital milk a surprise but productivity is higher when the average worker has more human capital ie education and skills so an increase in H over L will increase productivity or Y over L how does this affect Robinson producer well we know that Robinson Crusoe right now needs to catch fish so he will catch more fish if he has been trained in the best fishing techniques or has gained experience fishing what is being trained in fishing techniques or gaining experience what measures that Shema capital it's knowledge knowledge has allowed Robinson Crusoe to increases overall productivity catch more fish natural resources per worker Natural Resources is denoted as n it's the inputs into the production that nature provides land mineral deposits other things being equal more n allows a country to produce more Y in per worker terms an increase in n divided by L increases Y divided by L but there's a very key point to this some countries are rich because they have abundant natural resources but you don't have to have abundant natural resources you just have to import them so we have two countries Saudi Arabia is known for what it has a lot of natural resources there's a lot of oil Japan on the other hand does not necessarily have a lot of natural resources it is what they would call resource poor however Japan is tree which they train a ton so the Japanese economy over time has compensated for his lack of natural resources it's a very small island by trading the Robertsons Caruso's case he had better luck catching fish if the natural resources around his island otherwise known as fish were plentiful if they weren't she's gonna have a harder time isn't he technology all right technological knowledge is society's understanding of the best ways to produce a good and service now technology progress does not only mean a faster computer or a higher definition TV or a smaller cell phone it means any advanced knowledge that boosts productivity so when Henry Ford first standardized an assembly line in the United States he was advancing technical knowledge much of technical knowledge for missions from our space travel was then used for society's understanding of the best way to produce other goods and services even though originally it was used for the space shuttle or for the Apollo system or now for SpaceX many advances and knowledge are just basically allowing society to get more output from its resources in case of Robinson Caruso he would catch more fish if he has invented a better fishing lure he has basically gains knowledge over time on what fishing lures working what do not work and created a better fishing lure so what determines the u.s. standard of living well one thing is our productivity right we've just talked about that productivity the output per worker is correlated or is associated with our standard of living and what determines our productivity well it's the amount of physical capital per worker we just talked about that the amount of human capital per worker he talked about that the amount of Natural Resources per worker we talked about that and the amount of technical knowledge what about Robinson Caruso well he's just like our economy as a whole as the u.s. Robinson Caruso's economy's standard of living is directly associated to his productivity his output per worker and what determines his productivity well the number of fishing poles his physical capital the amount of training his human capital the supply of fish natural resources and the invention of new fishing techniques technical knowledge so what's the difference between technical knowledge and human capital and technical knowledge refers to society understanding of how to produce business services whereas human capital results through the efforts people expend to acquire this knowledge so human capital has takes the form of one we were learning how to do things once they become commonplace or they used all over the place they are now technical knowledge but you needed the human capital to get to the technical knowledge and both are very important for productivity because you have to constantly have the human capital who is gaining knowledge if you want to keep your technological knowledge going right why do we do this remember back to chapter 2 how we talked about how economists model things as a way to show how the economy works in nice and easy terms and then one of the models that we're going to discuss in macro is the production function and the production function is basically a graph or an equation and we're showing an equation here this shows the relationship between outputs and inputs so what is the same y which we now notice as GDP the real GDP CA is a level of Technology is a function f it's the function key everybody's got to remember back to algebra so there's our little function key is a function of Y the quantity of human labor k the quality of physical liver age human capital and natural resources notice a he's over here all by itself what is he doing it's a multiplier it's multiplying the function so improvements in technology increase is a and allows the output to be produced in any combinations of inputs right it allows more why does it allow more because it's a multiplier so any technology is going to basically have an effect on this entire function think about computers when we had improvements in technology and we had computers that were easily to use that were available to all that were accessible didn't require enormous rooms we changed many of these variables we change physical capital we change human capital and we can allocate our resources differently because we learn different technologies that helped us allocate our resources they're farming technologies etc we can monitor things differently from how we had ever done it before that is one of the reasons why is called the multiplier now this production function has the property of constant returns of state and if we all kind of put our heads back together and remember back to algebra that means that if you do anything to this side you do it what you have the same change over in the side so any change in inputs by the same percent cause the outputs to change by that percent and you change the inputs by any percent will prorate the outputs to change so by multiplying all the inputs by two causes the output to double so if you multiply l k h and n by 2 it will cause why it's double and the same thing is it sure if you do ten percents etc what's cool about this is we can multiply both sides by 1 over L what is this by doing this we're getting output per worker right now we're just talking about lkh n well if we want to know output per worker we need to multiply everything by 1 over L so if we take L we multiply it by 1 over L we get one if we take K and we multiplied by 1 over L we get K over L right because this would be K times 1 over L well that's going to equal what K over L do the same thing to H you're gonna get H over L and n which is going to give you an affray now obviously this is 1 so this just kind of goes away so what you end up looking at is you say to yourself the level of technology which is your multiplier you've got the physical capital worker right here the human capital per worker right here the natural resources per worker that's right there and this equation shows that this productivity per worker or output work per worker depends on what technology physical capital per worker human capital per worker and natural resources per worker taking this a step further we can look to see economic growth and public policy and we can kind of look at what public policy does to affect the long term growth and productivity and living standards so here's some public policies that we look at public policies involving investment and savings we can use the productivity by increasing K which is the physical capital now physical capital requires that people invest in factories and invest in the physical capital if resources are scarce producing more capital means you've got to trade off by producing more less consumption goods if you think about it in terms of a factory if the factory wants to buy a new machine it has to decrease the amount of output is doing in order to do what spend some money on that machine instead of on the inputs to go into those particular outputs so vice-versa if we reduce our consumption we as an economy then save more so simplistically put it if you don't buy a car and you put that money into savings you increased savings and reduce consumption these extra increases in savings cost extra funds that then can be used by different firms to produce goods and we're going to look at this a lot more in next chapter hence there's a trade-off between today and the future think y'all probably already realize that right in the ministry we turns in ketchup effect so the government can implement a policy that raises savings and investment and when the government does that they increase K because there's more savings in the system and more savings then in turn has more money in the banks more money in the banks means banks have more money to lend thanks lend more money to businesses businesses by capital this rise in K increases the productivity and the living standards but this growth is very temporary because of the diminishing returns of capital as K Rises the extra output from the additional Venis of K Falls it diminishes over time now what kind of policies would a government do that would raise savings and investments let's think about it government policies have to do with things like tax breaks and other types of incentives so a tax break would be something for instance about deferring the amount of tax you have to pay on your 401 K until after retirement we are encouraging people to save today for the future so what was that diminishing return thing I'm talking about yeah you were like what are you talking about I know so if you say this is your per capita per worker capital per worker and this is physical capital so there's your physical capital per worker and here is your GD productivity your output per worker so right here marks one spot on the curve and in the spot on the curve you have this much capital to work with and you have this much productivity if a worker just have little capital and you give them some more and then you increase it up to this point what happens their productivity Rises quite a bit doesn't it he rises a lot more so this difference here by giving them a little more Kay Rose your productivity quota cuts in there however if a group of workers way out here so they've got quite a bit of capita and there's you know their productivity is over here then if you increase it if you go over here and you increase it you say okay this is where I'm going to be look what happens you only get a little increase in your productivity because the workers already have a lot of K to work with so giving them more increases their productivity but fairly little this is the diminishing returns so what we're saying is over time if the additional capital is not necessarily increasing the productivity so you have to know what to use and where to use it so this is why it's called the ketchup effect remember when we were talking about countries and we were saying okay if you're a poor country we know you're probably somewhere here you've got a little bit of capital per worker and your productivity for workers okay we know if you increase the capital per worker available a poor country can increase their output per worker quite a bit but a rich country starting here if they increase their capital per worker they only end up increasing their productivity a little bit so a poor country can gradually increase their coworker and increase their productivity and catch up with a rich country so what it says is is that just because you're a poor country in your capital per worker and your wiper worker your output per worker is low does it mean you can't by investing in capital per worker you can't catch up Singapore so countries that have done this between 1960 and 1990 the US and Korea devoted a similar share of GDP to investment so we basically did the same thing if you wouldn't look at capital poor labor and you would look at the increase this distance here they were exactly the same however the growth in Korea was quite a bit larger than the growth in the US why was that because of the ketchup effect in 1960 Korea was way over here so that little effect the same amount got them a huge growth here whereas the US was already over here so that little change only got them that much the cancer project over time Korea could move themselves right over so how do you raise K over all this is where economics and foreign policy really start to intertwine because by investing abroad you can change K over L for another economy and thus you can increase the productivity the wages and the living standards and by doing so you literally are changing an economy and the government can encourage this and how the government encourages by direct foreign investment they encourage in this case the US citizens to make a capital investment in a factory or something that is owned and operated by a foreign identity we did a lot of this by the way in China we also did form portfolio investments it's a capital investment financed with for money but operated by us domestic residents so we literally gave money into a portfolio things going on but the domestic residents use that money accordingly some of the returns from these investment full back into us car country right because we supply goods for problems supply funds were probably getting interest etc in especially poor countries they can't generate enough savings to do anything about this K over L number they can't get enough investment money to make this K get larger these types of funding really work themselves so they can't get the savings to fund the investments themselves but they can if we pressed by portfolio or directly I believe Apple is a direct investment so you can also help poor countries by learning state-of-the-art technologies what was that does anybody remember that was that multiplier effect wasn't it and then we multiply all the variables on the side women education as a country and its government increases productivity by promoting education the investment in H why is that so darn important because H over L is one of the functions of the equation so when you increase H by public schools by loans for college you're making that H variable H over L larger and as we know as H over L goes up what happens y over L goes up each year of education raises a workers wages in the United States each year schooling raises your wages about 10% on average by investing in aged human capital you are making a trade off so a country has to consciously say we're gonna take the money and put it into something we're not gonna see a direct effect from right now what we're gonna see in the future because what happens you're sacrificing and the country's is Accra facing as well as the individuals each spending year in school is you're dispenses school is sacrificing a year's wages and I think you've all made that calculation now the country has to do so as well health nutrition health expenditures health care is a type of investment in human capital why because if the human capital is healthier they're more productive in countries with significant malnutrition raising the worker's caloric intake has increased productivity quite a bit 1962 in 1995 the caloric consumption rose 44% Korea and economic growth has been enormous this all comes believe it or not from a Nobel Prize winner who looked at the rate of growth in Britain from 1790 to 1980 and he attributed 30% of it purely to nutritional increases improvements property rights and political stability remember back to the political theories we talked about in Chapter 1 markets are a good way to organize economic activity well markets require this is a price system that allocates the resources to their most effective uses this requires a respect for property rights without property rights you need the ability to exercise authority over the resources they are if they cannot exercise authority over the resources they own then they have no stability in terms of their property and guess what happens people who don't believe they have any control over what happens to that property are less likely to take risks and or use this so in many countries with poor justice systems that just don't work very well contracts aren't always enforced fraud and corruption goes unpunished and firms can bribe officials because of these types of issues increase in certainty and whether property rights will be protected in the future and thus people are not willing to make direct or indirect investments into those countries because they're investing into those things that there may not be protected so when people fear that their capital may be stolen or worse even may be confiscated there's less investment so no money from abroad and people who live there are more likely to move their money abroad this makes living standard slower so economic stability knowing your economy is stable making sure it's efficient making sure there's a justice system and have healthy growth for law enforcement courts stable Constitution and autonomous government officials go a long way to people wanting to invest free trade free trade is a way in which all countries can increase the productivity inward oriented policies on free trade like tariffs and limits on investment from abroad our aims to increase the living standards with by avoiding interaction with other countries I will be oriented trade policy's well I mean we screwed up reefs or restrictions I'm sorry on trade and foreign investment promote a world economy what does this mean remember how I said treatment everybody better off when we talked about that well trade has the similar effects of discovering a new policy technology it promotes productivity in living standards so countries that have a morally oriented policies generally fail to create growth Arch attending I did this in 20th century countries that have out really oriented policies office succeed South Korea Singapore and Taiwan what about research and development well we talked about technology and technology possum progress is one of the main reasons why living standards rise in the long run and we know that one of the reasons is that knowledge is a public good it should be shared freely so once you get you have that human capital and you have those people learning and they have knowledge and they go out and they work and then the knowledge gets disseminated through the society it's a public good it increases the productivity but you have to basically reward somebody for creating these great and wonderful new inventions because otherwise what is the incentive so patent laws help people feel as though they're going to be getting some reward for their particular invention or their particular technology process progress is going to help everybody tax incentives and direct support for R&D is another way that we make people want to invent and to be entrepreneurial and grants that we give universities to go out and get think of new and different things these are all ways in which we are creating knowledge and knowledge becomes this public hood that we can all use population growth it affects your standard of living in three ways it stretches Natural Resources 200 years ago an economist funding I guess he was economist Malthus argued that population growth would strain society's ability to promote for itself so he basically said that this was going to be our oncoming oh we were going to this was so he since then the population has grown six-fold and in theory Malthus was right our living standards would have fallen but they rose because he failed to account for the technological progress and productivity growth that would occur because of it so he was purely looking at the allocation of resources across a population a labor force and he wasn't looking at the other factors that could have influenced it the bigger the population clearly the larger L and that dilute your capital stock it dilutes K over L and this applies to H as well so what ends up happening is you have lower productivity and let me standards because you have a larger population it also dilutes H it's a greater strain on the educational system if there's more people in it so countries with faster growing populations tend to have lower education allowance they tend to say okay my population is growing largely you don't have to go to school through high school we need 12th grade I believe you can only you can go through 10th that's what's happening then by doing so you are decreasing the H denominator so you're out your H is going down and your L is going up this is going up but this is going down so how do you combat that many countries have used policies to control population growth 1 so they've been very controversial is the one-child policy in China other ones are things like contraceptive and education and the availability and allowing people to make choices on one of the other ones the helps with population growth is literacy of females by increasing the opportunity cost of having babies because females have other options other than surely having children you do tend to delete the humans capital stock I'm sorry you tend not to dilute the head and capital stock in other words what happens is is that you've got K over L but now L isn't rising quite as fast as it once was because women now have other options so L Rises at this point rate versus the other this has decreased this hole on the K so many times and a lot of US policies have been around the notion of moving countries out of poverty by increasing the female half of the populations literacy allowing them other opportunities to grow and to expand their knowledge increasing the human capital as well as decreasing the L promoting technology so if you have more people who are scientists inventors and engineers they have more frequent discoveries if you have more frequent discoveries you have faster technology process so over history human years history growth rates increase as the world's population does increase and the more populated areas go faster than the less populated areas as long as they had not only L was growing but what else is growing so as long as people were able to get the education that becomes scientists inventors and engineers the population growth worked in their advantage because they had more scientists inventors engineers so let's review the concepts productivity has some determinants K over L is the human capital per worker H over L is the human capital per worker and over L is the natural resources per worker and a is a technology technological knowledge what do we know about these we know that each one of them has policies that help raise these determinate so what if some as determinants policies that raise each of these determinants well if you were to enlist three I have four or five here so we go through five encouraging savings and investment will raise what well Louise K and if you raise K then this number raises prices right if you encourage investment from abroad investment will increase K okay then this Rises if you promote public education now H will rise if H Rises this will rise if we have patent laws then people are more willing to be involved in technology and if you grow your population you will also control your population growth you can also increase this this was a controversial one because as I showed you there are two arguments of this correct there is the argument that population growth is okay because you didn't get more scientists but you have to be promoting the public education involved and have the investment if you're going to have the population growth otherwise you want to keep your K L relationship pretty similar so our natural resources the limits of growth some argue yeah they're depleting our rich depleting our resources and we should limit the population shouldn't grow and because populations are growing our natural resources are depleting and we're limiting our ability to grow everybody's living standards ah technological process helps us sometimes avoid these for instance we have hybrid cars that use less gaps that's a natural resource we're using less of that are insulation in our homes reduces energy required to heat and cool as resources become scarce earth its market price rises and it causes an incentive to conserve it and develop alternatives remember how we talked about economics is all about incentives so if all of a sudden the price of things becomes higher people start to find trying to find solutions around it and when they start to find solutions around that they're looking at an incentive to find a way around it so to summarize here's our equation remember it's beautiful what was this productivity it's a function of one which is basically labor over labor k l HL NL with a multiplier with some multiplier technology research and development what are the things that we talked about with this we talked about that savings and investment can increase this K over L we talked about the ketchup effect that some countries that have lower K over L can clearly move themselves up quite quickly in terms of productivity we talked about investment of abroad it's a quick way to increase Kol and we talked about free trade as being a positive with H we talked about education and educational policies being essential and the health and nutrition also are key to increasing h which then of course increases HR l a is all about research and development it's all about allowing people to do what she use and to feel like they have the right to research develop that their thoughts will be taken and respected and you'll Green has some political stability as well okay to summarize there are really large distresses across countries in terms of standard of living we looked at three at the very beginning to remember them they were Mexico they were the UK and they are Mali the productivity per unit of labor is the main determinant on the standard living standards in allama this productivity depends on human physical capital and human capital Natural Resources all per worker I'm sorry productivity depends on physical and human capital per worker Natural Resources per worker a technological knowledge the multiplier both of these factors especially technological progress can cause growth in the living standards of a llama policies that affect the growth are what seems in investment international trade education health the nutritional thing policies property rights and political stability resource development population growth and because of the diminishing returns of capital growth from investment venture slows downs and poor countries can catch up with rich ones so there is always hope hope you guys enjoyed this have a great week remember if you have any questions contact me otherwise I will talk to you