The Production Function Technology … combining the factors of production to get output Physical capital, human capital, natural resources (“land”)

Possible Sources of Differences in Output per Worker What We See

GDP and Capital per Worker, 2005 Cause – Effect – Cause

Relationship between Latitude and Income per Capita “Fertile ground” for capitalism

Relationship between Income per Capita and Population Growth Demographic Transition: Mortality transition Fertility transition

Income per Capita vs Total Fertility Rate

Nutrition versus GDP per Capita Cause – Effect – Cause

Life Expectancy Versus GDP per Capita Human capital indicator

Average Years of Schooling Versus GDP per Capita Human capital indicator Cause – Effect – Cause

Student Test Scores Versus GDP per Capita

GDP and Capital per Worker, 2005 Is Physical Capital Key to Development?

Financing Gaps and the Role of Aid Domar growth model: Y = k K ΔY = kΔK = kI g = ΔY/Y = k (I/K) In words: Growth rate is directly related to investment share Fundamental truth: Uses of Y = Sources of Y T + S + C = C + I + G + NX = C + I + G + Capital Outflow I = S + (T – G) + Capital Inflow I = National Saving + Capital Inflow

Financing Gaps and the Role of Aid I = National Saving + Capital Inflow If poor countries can’t save much of their meager incomes and If developed country capitalists aren’t eager to invest in poor countries There’s a “financing gap” Prescription:Provide aid/loans to developing countries They’ll pay back once they TAKE OFF BUT: Aid can substitute for domestic saving Aid can sustain private & public consumption Aid needn’t/hasn’t gone to productive investment