Principles of Economics Chapter 25 – Flashcards

Productivity is the quantity of goods and services produced from each unit of labor input. An economy's GDP measures two things at once: the total income earned by everyone in the economy, and the total expenditure on the economy's output of goods and services. For the economy as a whole, they must be equal. A nation can only enjoy a high standard of living if it can produce a large quantity of goods and services. One of the Ten Principles of Economics is: A country's standard of living depends on its ability to produce goods and services. Hence to observe large differences in living standards, we observe across countries or overtime, we must focus on the production of goods and services.

Each of these determinants of Crusoe's productivity - physical capital, human capital, natural resources, and technological knowledge - has a counterpart in more complex and realistic economies.

the stock of equipment and structures that are used to produce goods and services

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

the inputs into the production of goods and services that are provided by nature such as land rivers and mineral deposits

society's understanding of the best ways to produce goods and services

the property whereby the benefit from an extra unit of input declines as the quantity of the input increases. ** In the long run, the higher saving rate leads to a higher level of productivity, and income but not to higher growth in these variables. Reaching this long run however, can take quite a while. The diminishing returns to capital has another important implication: other things equal it is easier for a country to grow fast if it starts out relatively poor.

the property whereby countries that start off poor tend to grow more rapidly than countries that start of rich. Small amounts of capital investment would substantially raise worker productivity in poor countries where workers lack even the most rudimentary tools.

A capital investment that is owned and operated by a foreign entity is called a foreign direct investment. An investment that is financed with foreign money but operated by domestic residents is called the foreign portfolio investment. Investment from abroad does not have the same effect on all measures of economic prosperity. Foreign investment in a country raises the income of the people of that country (measured by GNP) by less than it raises the production in that country (measured by GDP). Investment from abroad is one way for poor countries to learn the state of the art technologies developed and used in richer countries.

investment in human capital is as important as investment in physical capital for a country's long run economic success. An externality is the effect of one person's actions on the well being of a bystander. One problem facing poor countries is the brain drain, the emigration of many highly educated workers to rich countries where these workers can enjoy a higher standard of living. If human capital does not have positive externalities, then this brain drain makes those people left behind poorer than they otherwise would be.

Healthier workers are more productive. The right investments in the health of the population provide one way for a nation to increase productivity and raise living standards.

Property rights refer to the ability of people to exercise authority over the resources they own. Courts serve as an important role in a market economy: They enforce property rights. One threat to property rights is political instability. When revolutions and coups are common, there is doubt about whether property rights will be respected in the future. If revolutionary gov confiscates the capital of some businesses people have less incentive to save, invest, and start new businesses. At the same time, foreigners have less incentive to invest in the country

Some poor countries have tried to achieve more rapid economic growth by pursuing inward oriented policies. These policies attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world. This policy has led countries to impose tariffs and other trade restrictions. Most economists today believe that poor countries are better off pursuing outward oriented policies that integrate these countries into the world economy. Trade in some ways is like technology. When a country exports wheat and imports textiles, the country benefits as if it had invented a technology for turning wheat into textiles. A country that eliminates trade restrictions will therefore experience the same kind of economic growth that would occur after a major technological advance. Inward orientation policies force countries to start producing all the goods it consumes, and producing all the capital goods it uses to produce those goods. Living standards immediately fall. The amount a nation trades with others is determined both by government policy and GEOGRAPHY. Countries with natural seaports find trade easier than countries without this resource. Because landlocked countries find trade more difficult, they tend to have lower levels of income than countries with easy access to the world's waterways. (Countries with 80% of population living within 100 kilometers of a coast have an average GDP per person about 4 times as large as countries with less than 20% of their population.

Technological knowledge has advanced causing living standards to rise. Knowledge is a public good: once a person discovers an idea the idea enters society's pool of knowledge and other people can freely use it. Government has a role in encouraging research and development as well as providing public goods. (NASA, NSF, NIH). Inventors can apply for a patent. If the product is deemed truly original. By allowing inventors to profit from their inventions, the patent system enhances the incentive for individuals and firms to engage in research.

A large population means more workers to produce goods and services. At the same time however, a large population means a larger total output of goods and services. Malthus argued that an ever increasing population would continually strain society's ability to provide for itself. As a result, mankind was doomed to forever live in poverty. Where did Malthus go wrong? Growth in human ingenuity has offset the effects of a larger population. When population growth is rapid, each worker is equipped with less capital. A smaller quantity of capital per worker leads to lower productivity and lower GDP per worker.