Economic Growth and Productivity

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Economic Growth and Productivity

• Chapter 13

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Study Questions

• 1. What is the standard of living and how is it
  measured?
• 2. How can the standard of living be raised?
• 3. What might lower the standard of living?
• 4. What is productivity and why is it important?

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Study Questions

• 5. How does specialization lead to efficiency?
• 6. What is necessary for specialization?
• 7. What is innovation and how does it increase
  productivity?

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Standard of Living

• Our material standard of living is an indication
  of our economic well-being.
• Standard of Living Total Output/Population

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Standard of Living

• How to raise the standard of living
• Reduce the population?

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Standard of Living

• How to raise the standard of living
• Reduce the population?
• Increase the total output!
• Ideally, the increase in total output must be
  greater than the increase in population.

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Increasing Total Output

• PPC pushes outward.
• GDP grows.
• To increase the productive capability
• increase the level of resources
• increase the efficiency of using those resources
• use better technology
• increase economic freedom

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Increase the Level of Resources

• Land use new extraction technology shift use
  to more pressing needs
• Labor increase numbers increase quality
• Capital keep interest rates low maintain a
  favorable climate for investment
• Entrepreneurship easy to start a business
  favorable tax/regulatory climate

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Increase the Level of Technology

• Encourage technological development
• Entrepreneurial response to changing market
  conditions
• No government protection of mature industries

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Can the Standard of Living Be Lowered?

• Yes, if
• resources are decreased
• economic freedom is restricted
• fail to keep up with modern technology
• stifling bureaucracy inhibits growth
• widespread corruption exists
• property rights are poorly defined

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Productivity

• Productivity Output/Input
• We use labor hours as a proxy for input, so
• Productivity Output/Labor Hours

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Improving Productivity

• Reducing waste
• Improved efficiency through specialization
• Innovation

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Reducing Waste

• Inefficient processes produce both desired goods
  and waste products.
• Improve process efficiency
• fewer waste products are produced
• more desired products are produced

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Specialization

• Division of labor
• Each worker specializes in one task
• improve skills
• gets better with practice
• invent new or better tools and processes
• Result more output per labor hour
• Productivity increases

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Comparative Advantage

• You can complete a task at a lower opportunity
  cost than others.
• You should specialize in that task.
• They should become your customers.

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Key to Increasing Standard of Living

• Specialize according to comparative advantage
• more output from fewer inputs
• Produce a surplus amount and exchange with others
  for goods they have a comparative advantage in.
• Result Greater output from fewer inputs.

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Innovation

• Reorganize the Production Process
• Switch Resource Inputs
• Mass Production
• Mechanization
• Mass Markets

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Reorganize the Production Process

• Batch mode to Assembly Line mode
• requires specialization
• multiple units in production at one time

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Switch Resource Inputs

• If one inputs costs rise, savings can be found
  by switching to an alternative input whose costs
  are lower.
• switching energy sources
• switching from human effort to robotics
• control by programmed computers

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Mass Production

• Large scale production of (nearly) identical
  units of output.
• spreads fixed costs over a large output
• enables purchase of inputs at bulk rates
• enables more specialization of workers and
  equipment
• all of these lower the average cost per unit
• enables sale at a lower price

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Mechanization

• For repetitive tasks, replace humans with
  specialized equipment
• result more uniformity in results
• faster production runs
• better quality of output
• lower production costs per unit

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Mechanization

• Low skill repetitive jobs are eliminated.
• Higher skill jobs are created
• engineering design
• manufacturing of equipment
• operation of equipment
• maintenance of equipment

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Mass Markets

• Catering to a larger market allows larger
  production runs.
• Lower costs
• Greater productivity
• More goods required to be produced
• More high skilled jobs created to operate and
  maintain equipment

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Results

• Efficiency gains
• Productivity gains
• Increase in economic growth
• Increase in wages
• Increase in standard of living

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Causes of Economic Growth - I

• Increased resources available
• Expanded capital goods base
• Increased/improved technology
• Increased productivity
• Protection of individual property rights
• Economic freedom

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Causes of Economic Growth - II

• Improved infrastructure
• Peace and stability
• Low or no political corruption
• A favorable tax climate
• A favorable regulatory climate

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Results of Economic Growth

• More satisfactions of wants and needs by more
  people
• Raised standard of living
• Reduced poverty rates
• Improved working conditions
• More leisure time
• Greater concern for the environment
• Greater ability to deal with poverty and
  environmental problems

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Technology helps growth

• http//www.econedlink.org/interactives/index.php?i
  id258typeeducator