Sherif Khalifa Sherif Khalifa () Economic Growth 1 / 29
There are tremendous variations in the standard of living around the world. The large differences in income are reflected in large differences in the quality of life. Even within a country, there are large changes in the standard of living over time. Economic Growth is the study of the factors behind these differences. Sherif Khalifa () Economic Growth 2 / 29
Sherif Khalifa () Economic Growth 3 / 29
A typical family with all their possessions in the U.K., an advanced economy Sherif Khalifa () Economic Growth 4 / 29
A typical family with all their possessions in Mali, a poor country Sherif Khalifa () Economic Growth 5 / 29
World map scaled by GDP Sherif Khalifa () Economic Growth 6 / 29
World map scaled by population Sherif Khalifa () Economic Growth 7 / 29
Definition Gross Domestic Product per capita is Gross Domestic Product divided by the population. GDP per capita = GDP Population Country A Country B GDP $1000 $1000 Population 10 50 GDP per capita $100 $20 Sherif Khalifa () Economic Growth 8 / 29
Sherif Khalifa () Economic Growth 9 / 29
Sherif Khalifa () Economic Growth 10 / 29
30000 25000 20000 15000 10000 5000 0 1000 1500 1820 1870 1913 1950 1973 2001 Western Europe Western Offshoots Japan Asia Latin America Eastern Europe &USSR Africa Sherif Khalifa () Economic Growth 11 / 29
Definition Growth rate of Gross Domestic Product per capita is the percentage change in Gross Domestic Product per capita. = Growth rate of GDP per capita [ ] Final GDP per capita Initial GDP per capita X 100 Initial GDP per capita Sherif Khalifa () Economic Growth 12 / 29
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Sherif Khalifa () Economic Growth 14 / 29
Sherif Khalifa () Economic Growth 15 / 29
Sherif Khalifa () Economic Growth 16 / 29
Definition Productivity is the quantity of goods and services produced from each unit of labor input. A country can enjoy a high standard of living only if it can produce a large quantity of goods and services. Productivity is the key determinant of living standards, and growth in productivity is the key determinant of growth in living standards. Productivity is determined by physical capital, human capital, labor input, natural endowments, and technological knowledge. Sherif Khalifa () Economic Growth 17 / 29
Y = AF (L, K, H, N) Y: Output A: Technology L: Labor input K: Physical Capital H: Human Capital N: Natural Endowments Sherif Khalifa () Economic Growth 18 / 29
Y = AF (L, K, H, N) 2Y = AF (2L, 2K, 2H, 2N) Productivity = Y ( L = AF 1, K L, H L, N ) L Y L : Productivity K L : Physical capital per worker H L : Human capital per worker : Natural resources per worker N L Sherif Khalifa () Economic Growth 19 / 29
Definition Physical capital is the stock of equipment, tools, and structures that are used to produce goods and services. Workers are more productive if they have more tools with which to work. More tools allow workers to produce output more quickly and more accurately. Physical capital is a produced factor of production. It is an input into the production process that in the past was an output from the production process. Physical capital is used to produce all kinds of goods and services, including more capital. Sherif Khalifa () Economic Growth 20 / 29
If the economy produces a large quantity of capital goods, then it will be able to produce more. One way to increase future productivity is to invest more current resources in the production of capital. Since resources are scarce, devoting resources to producing capital requires using fewer resources for current consumption. Decreasing consumption means increasing saving. This extra saving funds the production of capital goods. Growth requires the society to sacrifice consumption in the present to enjoy higher consumption in the future. Sherif Khalifa () Economic Growth 21 / 29
Definition Diminishing returns is the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases. Rich country s growth Y/L Poor country s growth Poor country starts here K/L Rich country starts here Sherif Khalifa () Economic Growth 22 / 29
Saving by domestic residents is not the only way for a country to invest, the other way is investment by foreigners. An investment that is owned and operated by a foreign entity is called foreign direct investment. An investment that is financed by foreigners but operated by domestic residents is called foreign portfolio investment. When foreigners invest in a country, they expect to earn a return on their investment. Beneficial to poor countries that cannot generate enough saving to fund investment projects themselves. Sherif Khalifa () Economic Growth 23 / 29
Definition Human capital is the knowledge and skills that workers acquire through education, training and experience. An educated person can generate new ideas about how best to produce goods and services. The brain drain is the emigration of many highly educated workers to developed countries. Human capital is the level of education and knowledge, in addition to health conditions as well. Healthier workers are more productive and more capable of labor and production. Some countries are poor because their populations are malnourished and cannot afford adequate health care. Sherif Khalifa () Economic Growth 24 / 29
Producing human capital requires inputs in the form of teachers, schools, libraries, and student time. Students have the job of producing the human capital that will be used in future production. Investment in human capital has a direct cost and an opportunity cost. The direct cost is that of tuition fees, school supplies, transportation, and others. The opportunity cost is when students forgo the earnings had they not been attending school. Sherif Khalifa () Economic Growth 25 / 29
Definition Natural endowments are the inputs into production that are provided by nature. Natural endowments take two forms: renewable resources and nonrenewable resources. There is only a limited supply of nonrenewable resources, once depleted it is impossible to create more. Natural resources are not necessary for an economy to be highly productive in producing goods and services. Natural resource abundance can be a curse, and is referred to as the "natural resources curse." Sherif Khalifa () Economic Growth 26 / 29
Definition Technological knowledge is the society s understanding of the best ways to produce goods and services. Some technology is common knowledge. After one persons uses it, everyone becomes aware of it. Some technology is proprietary. It is known only by the company that discovers and patents it. When a company discovers a new product, the patent system gives the company a temporary right to be its exclusive producer. When the patent expires, other companies are allowed to produce this product. Sherif Khalifa () Economic Growth 27 / 29
Definition Labor input is the number of workers multiplied by the working hours. Some argued that population growth would strain society s ability to provide for itself. More people implies more labor, lower productivity, and lower living standards. More people implies more scientists and inventors, more discoveries, and faster technological progress. Sherif Khalifa () Economic Growth 28 / 29
( ) H L initial = 1200 100 = 12 The labor force increases by 100 workers with 1195 years of education ( ) H 1200 + 1195 = L 100 + 100 = 11.975 All The labor force increases by 100 workers with 1205 years of education ( ) H 1200 + 1205 = L 100 + 100 = 12.025 All Sherif Khalifa () Economic Growth 29 / 29