1. Principles of Macroeconomics Chapter 12
Productivity and Economic Growth

2. Productivity – the amount of goods one worker can produce in one hour
Explains the differences in living standards across the world
Determines economic growth and economic well-being
Public policies can help enhance productivity within a country

3. Productivity and Standard of Living
Productivity determines the standard of living
Countries that are richer have:
Higher life expectancy
Greater access to basic resources: water, food ect.
Lower child and maternal mortality rates
Universal education for both genders
Standard of living can be measured via income per capita (or) GDP per capita

4. GDP per Capita

5. Life Expectancy Across the World

6. Access to Safe Drinking Water
Percentage of population with access to safe drinking water

7. Infant Mortality Rates
Number of deaths in children under 1 per 1000 live births

8. Adult Literacy Rates

9. Income and Growth Rates
Growth rates vary between countries and across time
Middle-income economies – Taiwan, Hong Kong, Singapore, Thailand – were very poor until 1980’s
Poor countries have the greatest potential for growth
Rich countries can grow too – but usually at a slower rate

10. Productivity and Growth
When a nation’s workers are very productive, real GDP is large and incomes are high
When productivity grows rapidly, so do living standards
4 Key Determinants of Productivity:
Physical capital per worker
Human capital per worker
Natural resources per worker
Technological Knowledge

11. Determinants of Productivity
Physical Capital per worker (K/L)
With more machines available in the country, each worker can produce more
Farming in US vs. farming in Zambia
Human Capital per worker (H/L)
Skills, education, training and technical knowledge
With a more educated work force, a country can produce a wider range of goods

12. Determinants of Productivity
Natural Resources per worker (N/L)
With more land, irrigable water, mineral deposits, a country can use its own resources in production
But, some countries are rich and depend on importing their natural resources (ie: Japan)
Technological Knowledge
Access to latest technology
Use of best practices in production
Advancement in knowledge that boosts productivity

13. Application 1 Consider a small economy that produces only t-shirts.
What is the physical capital per labor?
What is the labor productivity of this country?
What is the growth in production in this country?
Year
Physical Capital
Labor Force
Labor Hours
Output
2000
100 machines
10 workers
5000 hrs
7500 t-shirts
2001
130 machines
11,000 t-shirts
2002
160 machines
15,000 t-shirts
2003
190 machines
18,500 t-shirts
2004
220 machines
21,000 t-shirts
2005
250 machines
22,000 t-shirts

14. The Production Function & Diminishing Returns
K/L
Y/L
If workers have little K, giving them more increases their productivity a lot.
Output per worker (productivity)
If workers already have a lot of K, giving them more increases productivity fairly little.
This slide replicates Figure 1 from the text, which illustrates the relationship between productivity (output per worker) and one of its determinants: capital per worker.
The curve is drawn for given values of the other determinants of productivity (human capital per worker, natural resources per worker, technology). A change in any of these other determinants would shift the curve.
The graph is positively sloped: productivity is higher when the average worker has more capital.
The graph is curved, reflecting diminishing returns to capital: as the average worker gets more and more capital, productivity rises at a decreasing rate. Students may find it easier to understand the following statement (especially if this is their first course in economics): If workers don’t have very much capital, giving them more will increase their productivity a lot. If workers already have a lot of capital, giving them more won’t increase their productivity very much.
Capital per worker 14

15. Group Discussion Economic Policies to Enhance Growth:
All governments are concerned with sustaining and ensuring economic growth for their countries
What are some policies that you think are important to keep the economy growing?
What can the government do to promote economic growth?

16. Key Takeaways
The most essential component in ensuring high living standards is productivity
Differences in productivity explain the differences in living conditions across many countries
There are four key factors that determine productivity in a country
Governments can enhance productivity through promoting growth-enhancing policies