Chapter 14: Economic . Show how small differences in growth rates lead to. large differences in living . Explain why GDP per capita is average labor. productivity times the proportion of the population. . Discuss the determinants of average labor. . Discuss and evaluate government policies that promote. economic . Compare and contrast the benefits and costs of. economic . Describe the trade-offs between economic growth and. environmental quality. McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved. Living Standards.• Use an economic model to study the remarkable. rise in living standards. – Real GDP per person is a measure of the goods. available to a typical person.• One clue to growing prosperity in the 20th. century – GDP per person today is five times. greater than it was in 1929.• Comparisons across long periods are. complicated by lack of data. – The variety, quantity, and quality of goods increased. enormously in the 19th and 20th century. 142 Compound Interest.• Compound interest pays interest on the original. deposit and all previously accumulated interest.• Differences in interest rates matter. Interest Rate. Value of $10 after 210 years. (%). 2 $. 4 $37,. 6 $2,061,.• Growth rates in GDP per capita have the same effect. as interest rates. – Relatively small growth in GDP per capita has a very. large effect over a long period.• In the long run, the growth rate of an economy matters. 143 Real GDP per Capita.• Notation. – Y = real GDP. – N = number of people employed. – POP = population• GDP per capita is the product of output per worker. and the share of the total population that is working.• Consumption per person depends on. – How much each worker produces and. – The share of people working. 144 Average Labor Productivity.• US average labor productivity is. – 24 times that of Indonesia. – 100 times that of Bangladesh.• Six factors determine average labor productivity. capital. capital. and other natural resources. . and management. and legal environment. 145 Six factors determine average labor productivity: 1. Human Capital.• Human capital comprises the talents, education,. training, and skills of workers. – Human capital increases workers productivity.• Germany and Japan used human capital to. rebuild after World War II. – Professional scientists and engineers. – Apprentice and on-the-job training emphasized. – Japanese increased emphasis on early education.• Cost – Benefit Principle applies to building. human capital. – Premium paid to skilled workers. 146 2. Physical Capital.• More and better capital increases worker. productivity.• Factory owner employs two people and adds capital. – Each machine requires one dedicated operator. Number of Output per Hours Worked Output per. Machines Week per Week Hour Worked. 0 16,000 80 200. 1 32,000 80 400. 2 40,000 80 500. 3 40,000 80 500.• More capital increases output per hour.• Diminishing returns to capital. 147 3. Land and Other Natural. Resources.• Inputs other than capital increase worker.
