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Principles of Economics, Ninth Edition N. Gregory Mankiw

PowerPoint Slides prepared by:

V. Andreea CHIRITESCU

Eastern Illinois University

N. Gregory Mankiw Principles Of Economics Ninth Edition

Chapter 25

Production and Growth

Economic Growth around the World

Real GDP per person

Living standard

Vary widely from country to country

Growth rate

How rapidly real GDP per person grew in the typical year

Because of differences in growth rates

Ranking of countries by income changes substantially over time

Table 1 The Variety of Growth Experiences

Productivity, Part 1

Productivity

Quantity of goods and services

Produced from each unit of labor input

Why productivity is so important

Key determinant of living standards

Growth in productivity is the key determinant of growth in living standards

An economy’s income is the economy’s output

Productivity, Part 2

Determinants of productivity

Physical capital per worker

Human capital per worker

Natural resources per worker

Technological knowledge

Productivity, Part 3

Physical capital

Stock of equipment and structures

Used to produce goods and services

Human capital

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

Productivity, Part 4

Natural resources

Inputs into the production of goods and services

Provided by nature, such as land, rivers, and mineral deposits

Technological knowledge

Society’s understanding of the best ways to produce goods and services

Are Natural Resources a Limit to Growth?, Part 1

Argument

World’s population is almost 8 billion

Natural resources — will eventually limit how much the world’s economies can grow

Fixed supply of nonrenewable natural resources – will run out

Stop economic growth

Force living standards to fall

Are Natural Resources a Limit to Growth?, Part 2

Technological progress

Often yields ways to avoid these limits

Improved use of natural resources over time

Recycling

New materials

Are these efforts enough to permit continued economic growth?

Are Natural Resources a Limit to Growth?, Part 3

Prices of natural resources

Scarcity — reflected in market prices

Natural resource prices

Substantial short-run fluctuations

Stable or falling — over long spans of time

Our ability to conserve these resources

Growing more rapidly than their supplies are dwindling

Saving and Investment

Raise future productivity

Invest more current resources in the production of capital

Trade-off

Devote fewer resources to produce goods and services for current consumption

Diminishing Returns, Part 1

Higher savings rate

Fewer resources – used to make consumption goods

More resources – to make capital goods

Capital stock increases

Rising productivity

More rapid growth in GDP

Diminishing Returns, Part 2

Diminishing returns

Benefit from an extra unit of an input

Declines as the quantity of the input increases

In the long run, higher savings rate

Higher level of productivity

Higher level of income

Not higher growth in productivity or income

Figure 1 Illustrating the Production Function

Diminishing Returns, Part 3

Catch-up effect

Countries that start off poor

Tend to grow more rapidly than countries that start off rich

Poor countries

Low productivity

Even small amounts of capital investment

Increase workers’ productivity substantially

Diminishing Returns, Part 4

Rich countries

High productivity

Additional capital investment

Small effect on productivity

Poor countries

Tend to grow faster than rich countries

Investment from Abroad, Part 1

Investment from abroad

Another way for a country to invest in new capital

Foreign direct investment

Capital investment that is owned and operated by a foreign entity

Foreign portfolio investment

Investment financed with foreign money but operated by domestic residents

Investment from Abroad, Part 2

Benefits from investment

Some flow back to the foreign capital owners

Increase the economy’s stock of capital

Higher productivity

Higher wages

State-of-the-art technologies

Investment from Abroad, Part 3

World Bank

Encourages flow of capital to poor countries

Funds from world’s advanced countries

Makes loans to less developed countries

Roads, sewer systems, schools, other types of capital

Advice about how the funds might best be used

Investment from Abroad, Part 4

World Bank and the International Monetary Fund

Set up after World War II

Economic distress leads to:

Political turmoil, international tensions, and military conflict

Every country has an interest in promoting economic prosperity around the world

Education

Investment in human capital

Gap between wages of educated and uneducated workers

Opportunity cost: wages forgone

Conveys positive externalities

Public education – large subsidies to human-capital investment

Problem for poor countries: Brain drain

Health and Nutrition, Part 1

Human capital

Education

Expenditures that lead to a healthier population

Healthier workers

More productive

Wages

Reflect a worker’s productivity

Health and Nutrition, Part 2

Right investments in the health of the population

Increase productivity

Raise living standards

Historical trends: long-run economic growth

Improved health – from better nutrition

Taller workers – higher wages – better productivity

Health and Nutrition, Part 3

Vicious circle in poor countries

Poor countries are poor

Because their populations are not healthy

Populations are not healthy

Because they are poor and cannot afford better healthcare and nutrition

Health and Nutrition, Part 4

Virtuous circle

Policies that lead to more rapid economic growth

Would naturally improve health outcomes

Which in turn would further promote economic growth

Property Rights, Political Stability, Part 1

To foster economic growth

Protect property rights

Ability of people to exercise authority over the resources they own

Courts – enforce property rights

Promote political stability

Property rights

Prerequisite for the price system to work

Property Rights, Political Stability, Part 2

Lack of property rights

Major problem

Contracts are hard to enforce

Fraud goes unpunished

Corruption

Impedes the coordinating power of markets

Discourages domestic saving

Discourages investment from abroad

Property Rights, Political Stability, Part 3

Political instability

A threat to property rights

Revolutions and coups

Revolutionary government might confiscate the capital of some businesses

Domestic residents – less incentive to save, invest, and start new businesses

Foreigners – less incentive to invest

Free Trade, Part 1

Inward-oriented policies

Avoid interaction with the rest of the world

Infant-industry argument

Tariffs

Other trade restrictions

Adverse effect on economic growth

Free Trade, Part 2

Outward-oriented policies

Integrate into the world economy

International trade in goods and services

Economic growth

Amount of trade – determined by

Government policy

Geography

Easier to trade for countries with natural seaports

Research and Development

Knowledge – public good

Government – encourages research and development

Farming methods

Aerospace research (Air Force; NASA)

Research grants

National Science Foundation

National Institutes of Health

Tax breaks

Patent system

ASK THE EXPERTS

Innovation and Growth

“Future innovations worldwide will not be transformational enough to promote sustained per-capita economic growth rates in the United States and western Europe over the next century as high as those over the past 150 years.”

Population Growth, Part 1

Large population

More workers to produce goods and services

Larger total output of goods and services

More consumers

Stretching natural resources

Malthus: an ever-increasing population

Strain society’s ability to provide for itself

Mankind – doomed to forever live in poverty

Population Growth, Part 2

Diluting the capital stock

High population growth

Spread the capital stock more thinly

Lower productivity per worker

Lower GDP per worker

Reducing the rate of population growth

Government regulation

Increased awareness of birth control

Equal opportunities for women

Population Growth, Part 3

Promoting technological progress

World population growth

Engine for technological progress and economic prosperity

More people = More scientists, more inventors, more engineers

Why Is so much of Africa Poor? Part 1

World’s poorest live in sub-Saharan Africa

2017 GDP per person only $3,489 (23% of global average)

41% live on less than $1.90 per day (4x the global rate)

Why Is so much of Africa Poor? Part 2

Low capital investment, due to:

Low educational attainment

Poor health

High population growth

Geographic disadvantages

Restricted freedom

Rampant corruption

Legacy of colonization