Transcript Human Capital - cloudfront.net

3. [8 pts] Indicate whether each of the following is counted in
the U.S. GDP for the year 2006. Explain each of your answers.
(a) The value of used textbook sold through online auction in 2006.
Answer: No, it was counted the year it was produced. Because it was
not produced again, it would not be counted. That would be double counting.
[2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]
b. Rent paid in 2006 by residents in an apartment building built in 2000
Answer: Yes, rents consist of the income received by the households and
businesses that supply property resources. The properties have to be maintained
or “serviced” each year. It is included in the income approach to GDP.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
c. Commissions earned in 2006 by a stockbroker
Answer: Yes, payment is being made for productive services of the
broker. So the purchase of stocks would not count but his work would.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
d. The value of autos produced in 2006 entirely in South Korea by a
firm fully owned by U.S. citizens
Answer: No, GDP measures production inside the U.S. regardless of
ownership. These autos were produced in South Korea.
[2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]
ECONOMIC GROWTH
An increase in real GDP over time
An increase in Real GDP per capita over time
[Real GDP/population = Real GDP per capita]
•Increase in population decrease in the
standard of living
•Growth is a Goal [lessens the burden of scarcity]
•Main Sources of Growth
•Increases in Resources
•Increases in Productivity [Health, training,
education and motivation improvements]
Rule of 70- the time it takes a variable that
grows gradually over time to double
 $5,000
invested at 7 percent interest per
year, will double in size in 10 years
70/ 7 = 10
Can only be applied to positive growth
“RULE OF 70”
7
yrs
“REAL INCOME”
6
yrs
8
yrs
6
15
 Productivity refers to
the amount of goods
and services produced
from each unit of labor
input.
 A nation’s standard of
living is determined
largely by the
productivity of its
workers.
The inputs used to produce goods and
services are called the factors of
production.
The factors of production include:
 Physical capital (buildings and machinery)
 Human capital (education and training)
 Natural resources
 Technological knowledge (inventions)
The factors of production directly
determine productivity.
How Productivity Is Determined
 Physical Capital- produced factor of
production and stock of equipment and
structures that are used to produce goods and
services.
 Tools used to build or repair automobiles.
 Tools used to build furniture.
 Office buildings, schools, etc.
 Human Capital- knowledge and skills that
workers acquire through education, training,
and experience
Natural Resources- inputs used in production
that are provided by nature
 Renewable resources include trees and forests.
 Nonrenewable resources include petroleum and
coal.
 can be important but are not necessary for an
economy to be highly productive in
producing goods and services.
Technological Knowledge- society’s
understanding of the best ways to produce
goods and services. (super important)
http://www.yo
utube.com/wat
ch?v=rSKS96
DVx1M
Labor productivity-
output/worker
Sustained growth in rGDP/capita
occurs only when amount of
output produced by the average
worker increases steadily
This is the only way to measure
growth, not unemployment rate
Healthier workers are more productive.
Good investments in the health of the
population can lead to increase living
standards.
Countries can get caught in a vicious
cycle.
People are poor
People cannot
afford adequate
health care and
nutritious food.
 Why do economics focus on rGDP/capita as a
measure of economic progress rather than nGDP or
rGDP?
Look at a measure that rises with the standard of living
because the economists believe that if citizens are better
off than that’s the best measure of progress. rGDP/capita
accounts for changes in population and changes in prices
 Although China and India have higher growth rates
than the US, typical Chinese and Indian households
are far poorer than US households, why?
China and India have just begun to grow rapidly, so Chinese
and Indian households have not yet caught up with US
households
AGGREGATE PRODUCTION FUNCTION
Shows how productivity depends on the
quantities of physical capital/worker and
human capital/worker as well as the state
of technology
.4
GDP/worker= t(pc/worker) x (hc/worker)
t= technology
pc= physical capital/worker
hc= human capital/worker
.6
Production Function: another expression
 Y = A F(L, K, H, N)
 Y = quantity of output
 A = available production technology
 L = quantity of labor
 K = quantity of physical capital
 H = quantity of human capital
 N = quantity of natural resources
 F( ) is a function that shows how the inputs are
combined.
The Production Function
 Setting x = 1/L,
 Y/ L = A F(1, K/ L, H/ L, N/ L)
Where:
Y/L = output per worker
K/L = physical capital per worker
H/L = human capital per worker
N/L = natural resources per worker
 As the stock of capital rises, the extra output
produced from an additional unit of capital
falls; this property is called diminishing
returns.
 Because of diminishing returns, an increase in
the saving rate leads to higher growth only for
a while.
 In the long run, the higher saving rate leads to
a higher level of productivity and income, but
not to higher growth in these areas.
DIMINISHING RETURNS TO
PHYSICAL CAPITAL
If human capital/worker and
technology are fixed, each successive
increase in the amount of physical
capital/worker leads to a smaller
increase in productivity
More expensive equipment won’t
make a worker exponentially more
productive
Growth accounting- estimate
contribution of each major factor in the
aggregate production function to
economic growth
 Allows ability to calculate effects of greater
physical and human capital on economic
growth
Total factor productivity- amount of
output that can be achieved with a given
amount of factor inputs
increased
Expanding Productive Capacity
No change
Maintaining
our production
possibilities
Static Productive Capacity
decreased
Declining Productive Capacity
 International differences in rGDP/capita tend to
narrow over time
 Catch-up effect- condition that, other things being
equal, it is easier for a country to grow fast if it starts
out relatively poor
 Asia
 Increased savings
 Education- generate new ideas about how best to produce goods and
services, which in turn, might enter society’s pool of knowledge and provide an
external benefit to others.
 Technology (used technology that had already been
invented by the time they were ready)
 Problems (Africa and Latin America)
 Political instability
 Corruption
 Lack of investment
 Irresponsible gov’t policy eroding savings
Table 1 The Variety of Growth Experiences
Copyright©2004 South-Western
Green = free
Orange = partly free
Red = not free
PROPERTY RIGHTS AND POLITICAL
STABILITY
 Property rights refer to the ability of people to
exercise authority over the resources they
own.
 An economy-wide respect for property rights
is an important prerequisite for the price
system to work.
 It is necessary for investors to feel that their
investments are secure.
 The amounts of physical and human capital/worker
are unchanged, but there’s significant technological
progress, what’s the effect on the growth rate of
productivity?
Positive growth rate, because of the impact
of technology
 The amount of physical capital/worker grows, but the
level of human capital/worker and technology are
unchanged?
Productivity will grow, but due to diminishing
marginal returns, each successive increase
results in smaller productivity
DIFFERING GROWTH RATES
Increased I
Increased importance of education
Research and development
Role of gov’t
 Infrastructure- education, transportation,
communication, and technology
 Reliable banking
 Encourage saving and investment.
 Encourage investment from abroad
 Encourage education and training.
 Establish secure property rights and maintain
political stability.
 Promote free trade.
 Promote research and development.
Tax rates- too high? See Laffer Curve
The Russian government forced thousands of
people to move to Siberia in order to develop
the natural resources and economy of the
region.
Figure 1 Growth and Investment
(b) Investment 1960–1991
(a) Growth Rate 1960–1991
South Korea
Singapore
Japan
Israel
Canada
Brazil
West Germany
Mexico
United Kingdom
Nigeria
United States
India
Bangladesh
Chile
Rwanda
0
South Korea
Singapore
Japan
Israel
Canada
Brazil
West Germany
Mexico
United Kingdom
Nigeria
United States
India
Bangladesh
Chile
Rwanda
1
2
3
4
5
6 7
Growth Rate (percent)
0
10
20
30
40
Investment (percent of GDP)
Copyright©2003 Southwestern/Thomson Learning
100
Tax rate (%)
n
m
m
Maximum
Tax
Revenue
l
0
Tax revenue (dollars)
President Reagan said that after WWII, when he started making big money,
that he could do 4 movies before making$200,000 and hitting the top marginal
tax rate of 91%. After four, he would quit making movies until the next year.
Tax revenue (dollars)
b
0
Maximum Tax Revenue
c
a
Reagan
b
Tax rate (percent)
100
For rich people, this was a disincentive to keep working, so they would quit
when they hit the top marginal tax rate. For most workers, this was not the case.
Country
Per Capita
Luxembourg 80,800
Qatar
75,900
Bermuda
60,000
Norway
55,600
Kuwait
55,300
U.A.E.
55,200
U.S.
$46,000
Ireland
45,600
Hong Kong 42,000
Switzerland 39,800
Iceland
39,400
Canada
38,200
Australia
37,500
Denmark
37,400
Country
Sweden
U.K.
Germany
France
Japan
Italy
Australia
Russia
Mexico
China
Swaziland
Liberia
Zimbabwe
Congo, Rep of
Per Capita
36,900
35,300
34,400
33,800
33,800
31,000
24,000
14,600
12,500
5,300
4,800
500
500
300
China and India are still poorer than he U.S. was in 1900.
75% of Africans live on less than $2 a day & it is getting worse.
$46,000
There are 6.6 billion people on our planet; 5 billion are in the Third
World. 2.5 billion live on less than $2 a day. The direst poverty
is in Africa, home of the world’s 10 poorest countries. Over ½
the people of Sub-Sahara Africa live on less than $2 a day.
8 million people die each year because they are too poor to stay alive.
The Poorest Nations
Nation
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Per Capita
Congo, Rep. of
$300
Zimbabwe
$500
Liberia
$500
Somalia
$600
Ethiopia
$700
Niger
$700
Cen. African Rep. $700
Gambia, The
$800
Sierra Leone
$800
Malawi
$800
Djibouti
$1,000
½ of the world’s
population have
yet to make their
$25,989
first phone call.
GDP Per Capita
[in 1992 dollars]
$15,931
$6,538
1929
1967
1996
2007
Sustained growth-
continuing in the face
of limited supply of
resources and impact
on environment
Malthus- population
will grow
geometrically while
resources will grow
arithmetically
 Stretch natural
resources
 Dilute capital stock
 Technology: What is missing?
Radios: 1, Telephones: 0, Televisions: 1, VCRs: 0, Cars:
0
 No running water, sink, or bathroom!
 Most Valued Possession – the T.V.
 Interesting Details – kids must walk 3 hours to get to
and from school each day kids work 21 -28 hours a
week
 Technology: What is missing?
Radios: 1, Telephones: 0 Televisions: 0, Cars: 0
Why they don’t have a TV?
(No electricity. They have never seen a TV.)
 Most Valued Possessions
You can’t see them, but can you guess what
they are?
Religious books (parents, 1st daughter)
Schoolbooks (1st son) Jump-rope (1st
daughter)
 Technology: What is missing?
Radios: 2, Telephones: 0, Televisions: 1, Cars: 0
No washing machine: The women wash clothes
in the pond! No bathroom: They have two
outhouses.
 Most valued possession: bicycle
 Technology: What is missing?
Radios: 5, Telephones: 4, Televisions: 2, VCRs:
0, Stereos: 3, Cars: 2
 Most valued possession: sailboat
 Technology: What is missing?
Radios: 0, Telephones: 0, Televisions: 0, VCRs: 0,
Cars: 0 (No electricity, running water, or bathroom.)
 Most valued possession: none
 80% of their income is spent on food –
breakfast ic, potaoes, fish and coffee, lunch is only
potatoes, they do not eat dinner
 Technology: What is missing?
Radios: 1, Telephones: 1, Televisions: 1, VCRs: 1, Cars:
1
 Most valued possession: family and children
 Technology: What is missing?
Nothing is missing! Radios: 3, Telephones: 1,
Televisions: 1, Cars: 1, VCRs: 1, Microwave ovens: 1,
Computers: 1
 Most valued possession: family and heirloom ring
and pottery
 Technology: What is missing?
Radios: 4, Telephones: 5, Televisions: 2, VCRs: 2,
Computers: 1, Cars: 4
 Size of Home 4850 sq. ft. house
Their home is the one with a satellite dish on the roof
and a refrigerator in the carport.
Living room, sitting room, dining room, kitchen, 4
bedrooms, 4 bathrooms. Office, indoor swimming
pool, and servants’ quarters.
 Technology: What is missing?
Radios: 1, Telephones: 0, Televisions: 0, VCRs: 0,
Bicycles: 1, Cars: 0 (They have no electricity. No
running water, no kitchen sink, no bathroom.)
 Most Valued Possession
Bicycle (Father)
What do you suppose they wish for in the future?
(An irrigation system for their garden. An enclosed
garden. A motorcycle.)
 Technology: What is missing?
Radios: 1, Telephones: 0, Televisions: 1, VCRs: 1,
Stereos: 2, Cars: 0
Why do they have big bottles of water?
(They have running water. The city runs water lines
to the street. Every family runs a garden hose from
the street water main into their apartment.)
 Most valued possession: T.V.
 Technology: What is missing?
Radios: 2, Telephones: 2, Televisions: 2, VCRs: 0,
Stereos: 1, Cars: 1
 Most valued possession: mother (after the picture
was taken, the father was murdered, so the mother
takes care of the family alone)
 What do you suppose they wish for in the future?
(The mother hopes to repair her car.
Cost of repairs: $2,500)
 Technology: What is missing?
Radios: 1, Telephones: 0, Televisions: 1, VCRs: 0,
Cars: 0, Motorscooters: 1 (No bathroom or running
water: Mom washes in rubber tubs.)
 Most Valued Possessions: Motorscooter