Lesson 6: Economic Growth
LVL I Answer the following questions as you read
- What is the definition of productivity?
- What is an example of an input and an output?
- How does technology and capital investment increase productivity and overall economic growth?
- Define standard of living.
- How does one typically increase their standard of living?
- Define human capital.
- What is the relationship between level of education, earnings, and unemployment rate?
- What does the production possibilities model illustrate?
- Where on the graph do you see efficient levels of production? Inefficient production?
- What does point E on the graph illustrate?
- Why do investments in capital and human capital push the production curve outward?
SSEF6 Explain how productivity, economic growth, and future standards of living are influenced by investment in factories, machinery, new technology, and the health, education, and training of people.
1. Define productivity as the relationship of inputs to outputs.
Productivity looks at the relationship between inputs and outputs. An input is something that goes into making a good or service. For example, to make a cookie, a bakery must have ingredients like flour and sugar that come from natural resources like wheat and sugar cane. The baker must have capital resources like ovens and mixers to process the cookie dough. The baker needs labor resources to run the machines and serve the customers. The labor resources must have the appropriate human capital such as the ability to read the recipe, make decisions about when the baking of the cookies is complete, and how to package the cookies for sale to customers. If the baker is the owner of the bakery, he or she is the entrepreneurial resource who must choose to take a risk and decide how best to run the business. An output is the amount of a good or service produced. In the case of the baker described above, the cookie is the output. The baker wants to produce the right amount of output at the right price so he can make a profit. Increases in productivity occur when producers can produce more output with fewer inputs. This could occur because an entrepreneur finds ways to use his inputs more efficiently. For example, productivity might increase by using a recipe that requires less sugar, rearranging the production line to be more efficient, training labor resources to specialize in specific jobs, reducing the amount of inputs that are wasted in the production process, adding new, more efficient machinery or technology, or finding ways to motivate labor resources to produce more quickly.
2. Explain how investment in equipment and technology can lead to economic growth.
For the purposes of this element, investment refers to the introduction of machines and equipment, the building of new factories, and/or the purchasing and implementation of new production technology. Both firms and government entities invest in equipment and technology leading to economic growth. Consider again the example of the bakery from the last element. The productivity increase from the new oven applied only to the bakery. Imagine the effect on the economy if many firms made similar investments leading to large increases in productivity. Consider a scenario in which governments also invest in equipment and technology, increasing productivity in public goods and services. If this increased productivity across the economy happens while keeping prices of goods and services relatively stable, there will be economic growth. Remember, we measure economic growth by the change in the real GDP from one period to the next. If the total value of final goods and services produced within the country’s borders and adjusted for changes in the price level increases from one period to the next, there is economic growth in the country.
3. Explain how investments in human capital (e.g., education, job training, and healthcare) can lead to a higher standard of living.
Standard of living refers to the material well-being people in an economy enjoy. Usually, the higher the real GDP per capita a country has, the higher the standard of living of the people in that country will be. Remember, real GDP per capita is the value of final goods and services produced per person in an economy in a particular time period. As the output per person in the country increases, an economist would expect the amount of goods and service each person can consume to increase. In market leaning economies, the benefits of increases in real GDP per capita, are unequally distributed among the population of the country. The change in the standard of living for individuals in the economy will often depend upon the amount of human capital the individual members of the economy possess. Healthy, skilled, and well-educated participants in the economy are likely to enjoy a greater share of any increases in standard of living. For example, the chart below shows the relationship between educational attainment, weekly median wages, and unemployment. In most cases, the higher the education level, the higher the wage and lower the likelihood of unemployment. Since wages play a large role in determining the amount of goods and services individuals can consume, it is clear that more education means a better material well-being.
4. Analyze, by means of a production possibilities curve: trade-offs, opportunity cost, growth, and efficiency.A production possibilities curve is an economic model used by economists to illustrate all possible combinations of efficient production available to an individual, firm, or country given the resources available to produce the two goods or services shown on the graph. The model shows the amount of one good or service sacrificed to produce additional units of the other good or service. The model also shows the production combinations that are inefficient or impossible given current resources.
1. Define productivity as the relationship of inputs to outputs.
Productivity looks at the relationship between inputs and outputs. An input is something that goes into making a good or service. For example, to make a cookie, a bakery must have ingredients like flour and sugar that come from natural resources like wheat and sugar cane. The baker must have capital resources like ovens and mixers to process the cookie dough. The baker needs labor resources to run the machines and serve the customers. The labor resources must have the appropriate human capital such as the ability to read the recipe, make decisions about when the baking of the cookies is complete, and how to package the cookies for sale to customers. If the baker is the owner of the bakery, he or she is the entrepreneurial resource who must choose to take a risk and decide how best to run the business. An output is the amount of a good or service produced. In the case of the baker described above, the cookie is the output. The baker wants to produce the right amount of output at the right price so he can make a profit. Increases in productivity occur when producers can produce more output with fewer inputs. This could occur because an entrepreneur finds ways to use his inputs more efficiently. For example, productivity might increase by using a recipe that requires less sugar, rearranging the production line to be more efficient, training labor resources to specialize in specific jobs, reducing the amount of inputs that are wasted in the production process, adding new, more efficient machinery or technology, or finding ways to motivate labor resources to produce more quickly.
2. Explain how investment in equipment and technology can lead to economic growth.
For the purposes of this element, investment refers to the introduction of machines and equipment, the building of new factories, and/or the purchasing and implementation of new production technology. Both firms and government entities invest in equipment and technology leading to economic growth. Consider again the example of the bakery from the last element. The productivity increase from the new oven applied only to the bakery. Imagine the effect on the economy if many firms made similar investments leading to large increases in productivity. Consider a scenario in which governments also invest in equipment and technology, increasing productivity in public goods and services. If this increased productivity across the economy happens while keeping prices of goods and services relatively stable, there will be economic growth. Remember, we measure economic growth by the change in the real GDP from one period to the next. If the total value of final goods and services produced within the country’s borders and adjusted for changes in the price level increases from one period to the next, there is economic growth in the country.
3. Explain how investments in human capital (e.g., education, job training, and healthcare) can lead to a higher standard of living.
Standard of living refers to the material well-being people in an economy enjoy. Usually, the higher the real GDP per capita a country has, the higher the standard of living of the people in that country will be. Remember, real GDP per capita is the value of final goods and services produced per person in an economy in a particular time period. As the output per person in the country increases, an economist would expect the amount of goods and service each person can consume to increase. In market leaning economies, the benefits of increases in real GDP per capita, are unequally distributed among the population of the country. The change in the standard of living for individuals in the economy will often depend upon the amount of human capital the individual members of the economy possess. Healthy, skilled, and well-educated participants in the economy are likely to enjoy a greater share of any increases in standard of living. For example, the chart below shows the relationship between educational attainment, weekly median wages, and unemployment. In most cases, the higher the education level, the higher the wage and lower the likelihood of unemployment. Since wages play a large role in determining the amount of goods and services individuals can consume, it is clear that more education means a better material well-being.
4. Analyze, by means of a production possibilities curve: trade-offs, opportunity cost, growth, and efficiency.A production possibilities curve is an economic model used by economists to illustrate all possible combinations of efficient production available to an individual, firm, or country given the resources available to produce the two goods or services shown on the graph. The model shows the amount of one good or service sacrificed to produce additional units of the other good or service. The model also shows the production combinations that are inefficient or impossible given current resources.