2. Productivity and Quality Management Seventh Lecture

4. Last Lecture Improving Productivity Productivity Improvement Factors – 2 nd Theory Organizational Factors Management Factors Production Factors Government Factors Finance Factors Government Factors

5. BACKGROUND

6. Economic Infrastructure The most important economic changes are in employment patterns and the composition of capital, technology, scale and competitiveness Employment shifts from agriculture to manufacturing industry have caused an economy wide increase in productivity that has surpassed productivity growth within any one sector in developed countries The structural impacts of R&D and technology is another important factor in productivity improvement at macro Level Variations in composition of capital also affect productivity

7. Productivity and Global Economic Growth and Development

8. 9-8 Introduction About half of all U.S. engineers and computer scientists with Ph.D. degrees were born outside the United States. In this lecture, you will learn why countries that attract and retain the world’s hardest-working people tend to experience the highest sustained rates of productivity and economic growth.

9. 9-9 Learning Objectives Define economic growth Recognize the importance of economic growth rates Explain why productivity increases are crucial for maintaining economic growth

10. 9-10 Learning Objectives (cont'd) Describe the fundamental determinants of economic growth Understand the basis of new growth theory

11. 9-11 Did You Know That... Only one European nation, Luxembourg, has per capita real GDP higher than the U.S. per capita GDP? Per capita GDP has grown more rapidly in some U.S. states than in some European nations?

12. 9-12 How Do We Define Economic Growth? Economic growth reflects the fact that more of all goods can be produced within the economy.

13. 9-13 Figure 9-1 Economic Growth Distance of shift represents an increase in productive capacity In the simple PPC above, an increase in production stemming from economic growth can be represented by an outward shift.

14. 9-14 How Do We Define Economic Growth (cont’d)? There are two ways to define economic growth, depending upon the final goal. – An increase in real GDP over time – An increase in real per capita GDP over time The second definition is superior if the objective of the analysis is a comparison of living standards.

15. 9-15 How Do We Define Economic Growth? (cont'd) Observation – India has a real GDP more than fifteen times as large as that of Denmark. – India’s population is about 200 times greater than that of Denmark. – India is relatively poor and Denmark is relatively rich.

16. 9-16 How Do We Define Economic Growth? (cont'd) So…Economic Growth is – Increase in per capita real GDP measured by its rate of change per year

17. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-17 Figure 9-2 The Historical Record of U.S. Economic Growth

18. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-18 Table 9-1 Per Capita Real GDP Growth Rates in Various Countries

19. 9-19 How Do We Define Economic Growth? (cont'd) Limitations in the Definition – Says nothing about the distribution of output – Although per capita real output increases... “poor” people may stay poor or become poorer “rich” people may stay rich or become richer

20. 9-20 How Do We Define Economic Growth? (cont'd) Question – If your leisure time increases 1 hour/week and your commute time to work increases by 2 hours/week, are you better off? Answer – The per capital real GDP would understate the actual economic growth

21. 9-21 How Do We Define Economic Growth? (cont'd) Is economic growth bad? – Some psychologists contend that growth makes us worse off. The more we grow, the more “needs” are created so we feel worse off – As with all activities there are costs along with benefits to growth (see Table 9-2).

22. 9-22 Table 9-2 Costs and Benefits of Economic Growth

23. 9-23 How Do We Define Economic Growth? (cont'd) The importance of growth rates – Do we need to worry about small differences in the economic growth rate? – The difference between 3% and 4% may not mean much this year, but over time compound interest makes a HUGE difference.

24. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-24 Table 9-3 One Dollar Compounded Annually at Different Interest Rates

25. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-25 3%4%5% $4.38 trillion $7.11 trillion $11.5 trillion How Do We Define Economic Growth? (cont'd) GDP in 50 years at various growth rates starting at $1 trillion

26. 9-26 How Do We Define Economic Growth? (cont'd) The Rule of 70 – Tells us the approximate number of years it will take for some measure (i.e. RGDP, Price Level, Savings Account, etc.) to double, given specific percentage increase. – If AY is the approximate number of years required to double RGDP, then… AY = 70 / annual percentage rate of growth An economy with a 3% annual growth rate will take approximately 23 years for RGDP to double

27. 9-27 Factors Affecting the Ability to Grow There are 2 main ways in which an economy can grow: – An increase in inputs (i.e. labor and capital) – By increasing the productivity of these inputs

28. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-28 Economic growth = Rate of growth of capital stock + Rate of growth of the labor force + Rate of growth in the productivity of capital and of labor Productivity Increases: The Heart of Economic Growth

29. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-29 Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics Figure 9-3 Factors Accounting for Economic Growth in Selected Regions

30. 9-30 Causes of Economic Growth Labor Productivity – Improvements in labor productivity, all other things equal, lead to greater economic growth and higher living standards – Total real domestic output (real GDP) divided by the number of workers (output per worker)

31. 9-31 Example: Is Official Labor Productivity Growth Overstated? BLS reports U.S. labor productivity has increased by at least 21% since 2000. Self-employed people, managers, part-time, and temporary employees are excluded. Including these forms of labor might reduce productivity to as low as 11%.

32. 9-32 Causes of Economic Growth (cont’d) Saving – Higher savings rates lead to higher living standards in the long-run, because investment and the capital stock will increase – To have more consumption in the future, you must consume less today and save the difference between your consumption and your income.

33. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-33 Source: World Bank Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP

34. 9-34 Causes of Economic Growth (cont’d) Recall: Measuring “capital stock” and the “labor force” is not difficult, but measuring “productivity” is… New Growth Theory – A theory of economic growth that examines the factors that determine why technology, research, innovation, and the like are undertaken and how they interact Economic growth = Rate of growth of capital stock + Rate of growth of the labor force + Rate of growth in the productivity of capital and of labor

35. 9-35 Causes of Economic Growth (cont’d) Technology – We must look at technology as a separate factor of production – The greater the rewards, the more technological advances we will get.

36. 9-36 Causes of Economic Growth (cont’d) Aspects of Technology – Research and development (R&D) A certain amount of technological advancement occurs from R&D. The amount a nation spends on R&D can impact its long-term economic growth. For every 1% rise in the stock of R&D in the United States alone, productivity worldwide increases by about 0.25%.

37. 9-37 Causes of Economic Growth (cont’d) Research and development (R&D) – Patents A government protection that gives an inventor the exclusive right to make, use, or sell an invention for a limited period of time (currently, 20 years). By encouraging innovation, patents can lead to long- term economic growth.

38. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-38 Source: World Bank Figure 9-5 U.S. Patent Grants

39. 9-39 Causes of Economic Growth (cont’d) Aspects of Technology – Free trade encourages the spread of technology. – An “open economy” can lead to growth

40. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-40 Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers to International Trade

41. 9-41 Causes of Economic Growth (cont’d) Aspects of Technology – Innovation An “invention”, by itself, is not a cause of technological progress Transforming an “invention” into something that is useful to humans can cause long-term economic growth

42. 9-42 Causes of Economic Growth (cont’d) Aspects of Technology – The importance of ideas and knowledge Knowledge, ideas, and productivity are related; ideas are what drive economic growth. Economist Paul Romer suggests that growth can continue as long as we come up with new ideas.

43. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-43 Figure 9-7 The Winnowing Process of Research and Development

44. 9-44 Causes of Economic Growth (cont’d) Aspects of Technology – The importance of human capital Knowledge, ideas and, productivity are all tied together. Human capital consists of knowledge people acquire. Investing in human capital raises living standards and can cause long-term economic growth.

45. 9-45 Economic Development Question – How did developed countries travel paths of growth from extreme poverty to relative riches?

46. 9-46 Economic Development (cont'd) Development Economics – The study of factors that contribute to the economic growth of a country

47. 9-47 Economic Development (cont'd) The goal of development economists is to help the 4 billion people with low living standards to join the 2 billion people with moderately high ones.

48. 9-48 Economic Development (cont'd) Putting world poverty into perspective – At least one-half of the world’s population lives at subsistence level. – 20% of the world lives on less than $1 per day. – The U.S. poverty level exceeds the average income of one-half the world.

49. 9-49 Economic Development (cont'd) Relationship between population growth and economic development – There are nearly 7 billion people on earth. – By 2050, according to the U.N., world population will be close to 9.1 billion. – Growth will occur mainly in developing nations.

50. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-50 Figure 9-8 Expected Growth in World Population by 2050, Panel (a)

51. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-51 Figure 9-8 Expected Growth in World Population by 2050, Panel (b)

52. 9-52 Economic Development (cont'd) Modern rich nations went through three stages as they developed… – Agricultural stage – Manufacturing stage – Services stage It is important that nations that wish to develop specialize in those products in which they have a comparative advantage

53. 9-53 Economic Development (cont'd) Keys to economic development – Establishing a system of property rights – Developing an educated population – Letting “creative destruction” run its course Occurs when new businesses ultimately create new jobs and economic growth after first destroying old jobs, old companies, and old industries. – Limiting protectionism (i.e. “open economy”)

54. 9-54 Issues and Applications: Winners and Losers in the Brain-Drain Game The losers: nations with huge outflows of human capital; this damages prospects for economic growth. The winners: countries receiving highly skilled workers who immigrate and provide a “brain- gain.”

55. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-55 Figure 9-9 Nations with the Largest Percentage Emigrations of Skilled Workers

56. 9-56 Summary Discussion of Learning Objectives Economic growth – The rate of economic growth is the annual rate of change in per capita GDP. Why economic growth rates are important – Over long intervals, relatively small differences in the economic growth rate can produce large disparities in per capita incomes.

57. 9-57 Summary Discussion of Learning Objectives (cont'd) Why productivity increases are crucial for maintaining economic growth – For a nation with a stable population and steady capital growth, productivity growth is the main factor in economic expansion.

58. 9-58 Summary Discussion of Learning Objectives (cont'd) The key determinants of economic growth – Increases in the labor force, the growth of capital, and the growth of productivity New growth theory – Emphasizes how rewards to innovation contribute to higher growth rates

59. 9-59 Summary Discussion of Learning Objectives (cont'd) Fundamental factors that contribute to a nation’s economic development – Nations that encourage education, have a strong system of property rights, allow creative destruction, and avoid protectionism have higher levels of productivity and economic development.

60. 9-60 Lecture Summary How Do We Define Economic Growth? Productivity Increases: The Heart of Economic Growth Saving: A Fundamental Determinant of Economic Growth New Growth Theory and the Determinants of Growth Productivity and Economic Development

62. Improving Productivity