MakingIs IncomeAll ThatMatters?theConnectionBy concentratingon incomedifferencesbetweencountries,areeconomistsmissing something important?Whileincomes have not beenrising in, for example, sub-SaharanAfrica,economistCharles Kenny with the WorldBank argues that thosecountries have made rapidadvances in health, educationand civil and political liberties.William Easterly, an economist at NYU, confirms that advances inthese factors do not necessarily go hand in hand with incomeincreases,but areessentialtoraising livingstandards@2015Pearson Education,Inc.1
© 2015 Pearson Education, Inc. 11 Making the Connection Is Income All That Matters? By concentrating on income differences between countries, are economists missing something important? While incomes have not been rising in, for example, subSaharan Africa, economist Charles Kenny with the World Bank argues that those countries have made rapid advances in health, education, and civil and political liberties. William Easterly, an economist at NYU, confirms that advances in these factors do not necessarily go hand in hand with income increases, but are essential to raising living standards
WhatDeterminesHowFastEconomiesGrow?11.2LEARNINGOBJECTIVEUsetheeconomicgrowthmodeltoexplainwhygrowthratesdifferacrosscountries.12@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 12 What Determines How Fast Economies Grow? 11.2 Use the economic growth model to explain why growth rates differ across countries
Developinga Modelof EconomicGrowthAn economic growth model seeks to explain growth rates in realGDP per capita over the long run.As we noted last chapter, the key to this is labor productivity: thequantity of goods and services that can be produced by one worker orby one hour of work.Two main factors affect labor productivity:.The quantity of capital perhourworked, and:The leveloftechnologySo our model will concentrate on changes inthe quantity of capital.and technological changeTechnological change: A change in the quantity of output a firm canproduceusingagivenquantityofinputs.132015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 13 Developing a Model of Economic Growth An economic growth model seeks to explain growth rates in real GDP per capita over the long run. As we noted last chapter, the key to this is labor productivity: the quantity of goods and services that can be produced by one worker or by one hour of work. Two main factors affect labor productivity: • The quantity of capital per hour worked, and • The level of technology. So our model will concentrate on changes in the quantity of capital, and technological change. Technological change: A change in the quantity of output a firm can produce using a given quantity of inputs
Technological ChangeThere are three main sources of technological changeBetter machinery and equipmentInventions like the steam engine,machine tools, electric generators,andcomputershaveallowedfastereconomicgrowth.IncreasesinhumancapitalHuman capital is the accumulated knowledge and skills that workersacquirefromeducationandtrainingorfromtheirlifeexperiencesBetter means of organizing and managing productionIf managers can do a better job of organizing production, then laborproductivity can increase. An example of this is the just-in-timesystem, first developed by Toyota; this involves assembling goodsfrom parts that arrive at the factory exactly when they are needed.2015PearsonEducation,Inc.14
© 2015 Pearson Education, Inc. 14 Technological Change There are three main sources of technological change: Better machinery and equipment Inventions like the steam engine, machine tools, electric generators, and computers have allowed faster economic growth. Increases in human capital Human capital is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences. Better means of organizing and managing production If managers can do a better job of organizing production, then labor productivity can increase. An example of this is the just-in-time system, first developed by Toyota; this involves assembling goods from parts that arrive at the factory exactly when they are needed
Production perWorkerReal GDPperhourworked,Suppose we wanted toYILPer-workerdescribe a per-workerproduction2....leadtodiminishingfunctionproduction function: theincreases inoutput perhourworkedrelationship betweenreal$575GDPperhourworked,and475capital per hour worked,holding the level of technology350constant.1.Equal increases200incapitalperworker....The first units of capitalwould be the most040,00050,000$20,00030,000Capital perhoureffective, allowing outputworked,K/LFigure 11.3Theper-workerper hour to increase most.production functionSubsequent increases would result in diminishing returns:smallerincreases inoutput resulting from increasing one factorofproductionprogressivelyhigherwhilekeepingtheotherfactorsofproductionconstant15@2015PearsonEduion.lnc
© 2015 Pearson Education, Inc. 15 Production per Worker Suppose we wanted to describe a per-worker production function: the relationship between real GDP per hour worked, and capital per hour worked, holding the level of technology constant. • The first units of capital would be the most effective, allowing output per hour to increase most. • Subsequent increases would result in diminishing returns: smaller increases in output resulting from increasing one factor of production progressively higher while keeping the other factors of production constant. The per-worker production function Figure 11.3