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Outline:
Productivity – the quantity of goods &services produced from each unit of labor
input.
Determinants of Productivity:
– Physical capital, K (stock of equipment & structures that are used to
produce goods &services)
– Human capital, H (knowledge & skills that workers acquire through education
and experience)
– Natural resources, N (inputs into the production of goods &services that are
provided by nature)
– Technological knowledge, T (society’s understanding of the best ways to
produce g&S)
Y= A F (L,K,H,N) A- variable
• Free Trade:
1) Inward-oriented policies – avoiding interaction with the rest of the world
2) Outward- oriented policies – interacting with other nations of the world
• Since growth rates vary, the country ranking can change over time.
– Poor countries are not necessarily doomed to poverty forever.
– Rich countries cannot take their status for granted, because they may be
overtaken by poorer but faster-growing countries.
• A country’s standard of living depends on productivity.
Exercises:
1) Consider two countries, Fritolaysia and Khandibar. Currently, real GDP per
person (average income) is $35,000 in Fritolaysia and $12,000 in Khandibar.
Over the past decade, real GDP per person grew at a rate of 1.4% in
Fritolaysia, and 2.6% in Khandibar.
-To project real GDP per person you use the following formula:
-If average income continues to grow at 1.4% per year in Fritolaysia, and
2.6% in Khandibar, real GDP per person in Fritolaysia will be less that the real
GDP per person in Khandibar after 100 yrs.
-If the growth of average income falls slightly to 1.1% per year in Fritolaysia,
and to 2.1% per year in Khandibar, real GDP per person in Fritolaysia this
time will be greater than real GDP per person in Khandibar after 1000 years.
• The looms used to weave the textiles the textiles are examples of physical
capital.
• A special technique that workers can use to create stronger textiles is an
example of technological knowledge.
• The training workers receive in order to use and repair the printing presses, is
an example of human capital.
*To find physical capital per worker you use physical capital & labor force:
Physical Capital per Worker 2013 = 50 looms / 20 workers = 2.50 looms per
worker
*To find labor productivity you use output and labor hours:
Labor Productivity in 2013 = 4,500 garments / 2,000 hrs of labor = 2.25
garments per hr of labor