Economic Growth and Productivity

Study Questions

n 1. What is the standard of living and how is it measured?

n 2. How can the standard of living be raised?

n 3. What might lower the standard of living?

n 4. What is productivity and why is it important?

n 5. How does specialization lead to efficiency?

n 6. What is necessary for specialization?

n 7. What is innovation and how does it increase productivity?

Standard of Living

n Our material standard of living is an indication of our economic well-being.

¨ Standard of Living = Total Output/Population

Standard of Living

n How to raise the standard of living:

¨ Reduce the population?

Standard of Living

n How to raise the standard of living:

¨ Reduce the population?

¨ Increase the total output!

n Ideally, the increase in total output must be greater than the increase in population.

Increasing Total Output

n PPC pushes outward.

n GDP grows.

n To increase the productive capability:

¨ increase the level of resources

¨ increase the efficiency of using those resources

¨ use better technology

¨ increase economic freedom

Increase the Level of Resources

n Land – use new extraction technology; shift use to more pressing needs

n Labor – increase numbers; increase quality

n Capital – keep interest rates low; maintain a favorable climate for investment

n Entrepreneurship – easy to start a business; favorable tax/regulatory climate

Increase the Level of Technology

n Encourage technological development

n Entrepreneurial response to changing market conditions

n No government protection of mature industries

Can the Standard of Living Be Lowered?

n Yes, if:

¨ resources are decreased

¨ economic freedom is restricted

¨ fail to keep up with modern technology

¨ stifling bureaucracy inhibits growth

¨ widespread corruption exists

¨ property rights are poorly defined

Productivity

n Productivity = Output/Input

n We use labor hours as a proxy for input, so:

n Productivity = Output/Labor Hours

Improving Productivity

n Reducing waste

n Improved efficiency through specialization

n Innovation

Reducing Waste

n Inefficient processes produce both desired goods and waste products.

n Improve process efficiency:

¨ fewer waste products are produced

¨ more desired products are produced

Specialization

n Division of labor:

¨ Each worker specializes in one task

n improve skills

n gets better with practice

n invent new or better tools and processes

¨ Result: more output per labor hour

¨ Productivity increases

Comparative Advantage

n You can complete a task at a lower opportunity cost than others.

n You should specialize in that task.

n They should become your customers.

Key to Increasing Standard of Living

n Specialize according to comparative advantage:

¨ more output from fewer inputs

n Produce a surplus amount and exchange with others for goods they have a comparative advantage in.

n Result: Greater output from fewer inputs.

Innovation

n Reorganize the Production Process

n Switch Resource Inputs

n Mass Production

n Mechanization

n Mass Markets

Reorganize the Production Process

n Batch mode to Assembly Line mode

¨ requires specialization

¨ multiple units in production at one time

Switch Resource Inputs

n If one input’s costs rise, savings can be found by switching to an alternative input whose costs are lower.

¨ switching energy sources

¨ switching from human effort to robotics

¨ control by programmed computers

Mass Production

n Large scale production of (nearly) identical units of output.

¨ spreads fixed costs over a large output

¨ enables purchase of inputs at bulk rates

¨ enables more specialization of workers and equipment

¨ all of these lower the average cost per unit

¨ enables sale at a lower price

Mechanization

n For repetitive tasks, replace humans with specialized equipment

¨ result: more uniformity in results

¨ faster production runs

¨ better quality of output

¨ lower production costs per unit

Mechanization

n Low skill repetitive jobs are eliminated.

n Higher skill jobs are created:

¨ engineering design

¨ manufacturing of equipment

¨ operation of equipment

¨ maintenance of equipment

Mass Markets

n Catering to a larger market allows larger production runs.

¨ Lower costs

¨ Greater productivity

¨ More goods required to be produced

¨ More high skilled jobs created to operate and maintain equipment

Results

n Efficiency gains

n Productivity gains

n Increase in economic growth

n Increase in wages

n Increase in standard of living

Causes of Economic Growth - I

n Increased resources available

n Expanded capital goods base

n Increased/improved technology

n Increased productivity

n Protection of individual property rights

n Economic freedom

Causes of Economic Growth - II

n Improved infrastructure

n Peace and stability

n Low or no political corruption

n A favorable tax climate

n A favorable regulatory climate

Results of Economic Growth

n More satisfactions of wants and needs by more people

n Raised standard of living

n Reduced poverty rates

n Improved working conditions

n More leisure time

n Greater concern for the environment

n Greater ability to deal with poverty and environmental problems