Part 9 THE REAL ECONOMY IN THE LONG RUN

25 Production and Growth

LR Growth  Production Standard of living depends on its ability to produce goods /services. Standard of living = real GDP/L = labor productivity (1) Cross-country comparison: 跨區比較 vary significantly among nations. (2) Over-time comparison: 跨時比較 For a country, large changes over time.

Table 25.1 The Variety of Growth Experiences Copyright©2004 South-Western

Taiwan: Growth rate Taiwan: real GDP per person has grown by about 6 percent per year. Annual growth rates that seem small become large when compounded for many years: 1961： 3,5000元/年 2007：57,2451元/年 % real GDP per capita 歷年平均成長率 5.93 1951-1960 4.59 1961-1970 6.80 1971-1980 7.82 1981-1990 6.55 1991-2000 5.57 2001-2007 3.35

Taiwan: GDP per capita

Ln (real GDP per capita) and LR trend

Deviation from trend: SR fluctuations (business cycle)

Production Function 生產函數 a production function to describe the relationship between inputs and output. Real Output (Y，這章定義為大寫) Inputs: factors of production 生產要素

The Production Function Y = A F(L, K, H, N) Y = quantity of output A = available production technology L = quantity of labor K = quantity of physical capital H = quantity of human capital N = quantity of natural resources F( ) :a function that shows how inputs are combined.

Factors of Production Labor (L): 勞動 Physical Capital (K): 有形的資本 working population Physical Capital (K): 有形的資本 a produced factor of production. the stock of equipment and structures. Human Capital (H):人力資本 knowledge and skills that workers acquire through education, training, and experience

Factors of Production Natural Resources (N):自然資源 land, rivers, and mineral deposits. Renewable or Nonrenewable Technological Knowledge (A): 技術水準 the best ways to produce goods and services. Management skill

The Production Function A production function has constant returns to scale (CRS) if, for any positive number x, xY = A F(xL, xK, xH, xN) A doubling of all inputs causes output to double. Setting x = 1/L, Y/ L = A F(1, K/ L, H/ L, N/ L) Where: Y/L = output per worker K/L = physical capital per worker H/L = human capital per worker N/L = natural resources per worker

The Production Function Y/ L = A F(K/ L, H/ L, N/ L)  production function per worker Labor productivity (Y/L) depends on (K/L), (H/L), (N/L), and (A). The growth of (K/L), (H/L), (N/L), and (A) contribute the growth of (Y/L) . The role of △K, △H,△L, and △A (△N.=0)

PUBLIC POLICY Government Policies that Raise Productivity and Living Standards 1. Encourage saving and investment. △K 2. Encourage investment from abroad △K 3. Encourage education and training. △H 4. Promote research and development. △A 5. Establish secure property rights and maintain political stability. △A 6. Promote free trade. △A

Importance of Saving and Investment ( △K) Ch26,31: National Saving (S) St = Yt- Ct - Gt = It + NXt Kt+1=(1-δ)Kt+ It δ: depreciation rate(折舊率) St↑ → It↑ → Kt+1↑ → Yt+1↑ to invest more current resources in the production of capital.  to raise future productivity

Fig 25.1 Illustrating the Production Function Output per worker 2. When the economy has a high level of capital, an extra unit of capital leads to a small increase in output. 1 1. When the economy has a low level of capital, an extra unit of capital leads to a large increase in output. 1 Capital per worker

Taiwan: Saving, Investment, Growth nominal GDP per capita I S 歷年平均 成長率 5.93 22.62 24.26 1951-1960 4.59 15.99 9.76 1961-1970 6.80 21.71 19.61 1971-1980 7.82 30.09 31.71 1981-1990 6.55 22.60 32.51 2001-2007 3.35 20.20 25.89

Diminishing Returns and the Catch-Up Effect Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while, and a higher level of productivity and income in LR, but growth will eventually slow down.

Catch-Up Effect Due to Diminishing Returns  The catch-up effect ： countries that start off poor tend to grow more rapidly than countries that start off rich.

2. Investment from Abroad ( △K) Governments can increase capital accumulation and long-term economic growth by encouraging investment from foreign sources. several forms: Foreign Direct Investment Foreign Portfolio Investment

3. Education ( △H) In the United States, each year of schooling raises a person’s wage, on average, by about 10 percent. Taiwan: 10% for college education new ideas: society’s pool of knowledge and provide an external benefit to others. brain drain —the emigration of highly educated workers to rich countries.

4. Health and Nutrition ( △H) Healthier workers are more productive. Good investments in the health of the population can lead to increase living standards. Countries can get caught in a vicious cycle. People cannot afford adequate health care and nutritious food. People are poor

5. Property Rights and Political Stability(△A) Property rights refer to the ability of people to exercise authority over the resources they own. important prerequisite for the price system to work. for investors to feel that their investments are secure.

6. Free Trade ( △A) Trade is, in some ways, a type of technology. Some countries engage in . . . . . . inward-orientated trade policies: Infant-industry argument . . . outward-orientated trade policies: Comparative advantages

7. Research and Development (R&D : △A) Technological advance is the main engine for subsistent growth. Most technological advance comes from private research by firms and individual inventors. Gov’t can encourage the development of new technologies through research grants, tax breaks, and the patent system.

Regarding Population Growth (△L) long debated how population growth affects a society. L↑ → Y↑ but (Y/L) may↓ Population growth interacts with other factors of production: Stretching natural resources Diluting the capital stock Promoting technological progress

CASE STUDY: The Productivity Slowdown and Speedup U.S. growth rate of productivity: 1959-1973 : 3.2%. 1973-1995: 1.5%. 1995-2001: 2.6%. Taiwan % real GDP per capita 歷年平均成長率 5.93 1951-1960 4.59 1961-1970 6.80 1971-1980 7.82 1981-1990 6.55 1991-2000 5.57 2001-2007 3.35

Importance of △A Many economists attribute the slowdown and speedup in economic growth to changes in technology and the creation of new ideas.

Summary The standard of living depends on the economy’s ability to produce goods and services. Productivity depends on the amounts of physical capital, human capital, natural resources, and technological knowledge. Government policies can influence the economy’s growth rate in many different ways.

Summary Because of diminishing returns, higher saving leads to a higher growth for a period of time, but growth will eventually slow down. Technological advance is the main engine for subsistent growth.