Production and Growth

Productivity: The amount of goods produced per labor input. A higher productivity corresponds to a higher standard of living. One of the factors of production is capital. Capital is a produced factor of production, meaning it was an output of a production previously. There are four Determinants of output:

1. Physical Capital: This is all the tech and machinery needed for more efficient production.
2. Human Capital: Skilled human capital are essential for high productivity.
3. Natural Resources: Having more natural resources per worker would cause an increment in productivity. Are of two kinds, renewable and non renewable. Important, but not necessary.
4. Technological Knowledge: Proprietary knowledge is knowledge under secret (coke), common sense is available to everyone (Ford manufacturing) and temporary proprietary knowledge is hidden for a short time (pharma). Technological knowledge is society’s understanding, whereas human capital is a worker’s quality.

Productivity Policies

Capital suffers from diminishing returns. That is, increment in production by every additional unit of capital produced decreases as capital produced increases. ($\log$ graph) This is called as Diminishing marginal product of capital. Therefore, increasing savings increases production for a while only. Similarly, the countries which start off poor increase productivity rapidly, and this is called as the catch-up effect.

A direct investment from abroad is called as foreign direct investment, and indirect investment (by buying stocks and the such) is called as foreign portfolio investment. This causes both GNP and GDP to rise, although GDP rise is larger than GNP rise. Less developed countries do this to increase productivity, income, and to learn new technologies. Investment is encouraged by removing restrictions.

Policies which restrict trading are called inwards-oriented policies. “I am in infancy of production, how will I survive on opening myself to the competition?” However, outwards-oriented policies usually tend to dramatically increase productivity of a country.

Human Capital

Education is investment in human capital. The opportunity cost here is the wages that could’ve been earnt had the person been working. Has a positive externalities on the society. A major problem is brain drain, where the highly educated move to the developed country, decreasing the capital of the original country further.

Healthcare is also an example of human capital. Well nourished workers are more productive, and this is an important case in developing countries.

Research is also an important factor in standard of living. Once an idea comes up, it usually becomes public property. Governments can invest in research and incentivize it by awarding patents.

Political Stability

Property rights are very important as no one would work if they expected the results of their labor to be stolen. Political instability decreases confidence that property rights would be upheld, and this decreases productivity.

Population

Population stretches the present natural resources, causing poverty. However, human ingenuity has out-weighed this (there is less poverty although population has increased 6-fold)

Population rise thins out present capital, meaning each person will have less capital to work with which decreases productivity. It also is difficult to train human capital when there’s too many.

Population rise increases the number of potential scientists and engineers, meaning a country with large population is likely to do better in terms of research.