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Key Economic Concepts

• The aggregate production function is a graphical way of measuring how physical capital per worker, human capital per worker, and technology are combined to produce real GDP per worker.

• There are diminishing returns to increasing physical capital per worker.

• The importance of natural resources has diminished in a nation’s economic growth, though destruction of the natural resources is widely accepted as not conducive to strong growth.

• History tells us that the formula for a nation’s economic success is complicated and not easy for economists to predict.

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Module Layout

I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function

B. What About Natural Resources?

II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

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I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function:

Productivity depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology.

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+$30,000

+$15,000

+$10,000

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I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function:

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I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function:

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Growth Accounting

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I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function:

B. What About Natural Resources?

Natural resources were very important for economic growth when there were vast territories that remained undeveloped. As North America became more populous, the fertile farmland and timber and mineral resources played a huge role in the growth of the U.S. and Canada.

Not any more. Policies for growth and economic freedom.

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I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function:

B. What About Natural Resources?

CONVERGENCE THEORY:

Differences in real GDP per capita among countries tend to narrow over time because countries that start with lower real GDP per capita tend to have higher growth rates.

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

Since 1975, the whole region of East Asia has increased real GDP per capita by 6% per year, three times America’s historical rate of growth.

How have the Asian countries achieved such high growth rates?

All of the sources of productivity growth have been working.

• Very high savings rates. The percentage of GDP that is saved nationally in any given year, have allowed the countries to significantly increase the amount of physical capital per worker.

• Very good basic education has permitted a rapid improvement in human capital.

• Substantial technological progress.

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

Since 1975, the whole region of East Asia has increased real GDP per capita by 6% per year, three times America’s historical rate of growth.

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

Since about 1920, growth in Latin America has been disappointing.

The fact that South Korea is now much richer than Argentina would have seemed inconceivable a few generations ago.

Why has Latin America stagnated?

Comparisons with East Asian success stories suggest several factors.

• The rates of savings and investment spending in Latin America have been much lower than in East Asia, partly as a result of irresponsible government policy that has eroded savings through high inflation, bank failures, and other disruptions.

• Education—especially broad basic education—has been underemphasized: even Latin American nations rich in natural resources often failed to channel that wealth into their educational systems.

• Political instability, leading to irresponsible economic policies, has taken a toll.

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

Since about 1920, growth in Latin America has been disappointing.

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

Real GDP per capita in sub-Saharan Africa actually fell 13 percent from 1980 to 1994, although it has recovered since then. The consequence of this poor growth performance has been intense and continuing poverty.

Several factors are probably crucial.

• Problem of political instability. In the years since 1975, large parts of Africa have experienced savage civil wars (often with outside powers backing rival sides) that have killed millions of people and made productive investment spending impossible.

• The threat of war and general anarchy has also inhibited other important preconditions for growth, such as education and provision of necessary infrastructure.

• Property rights are also a problem. The lack of legal safeguards means that property owners are often subject to extortion because of government corruption, making them averse to owning property or improving it. This is especially damaging in a country that is very poor.

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

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II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

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Module Layout-Questions

I. Productivity and Growth

A. Accounting for Growth: The Aggregate Production Function

B. What About Natural Resources?

II. Success, Disappointment, and Failure

A. East Asia’s Miracle

B. Latin America’s Disappointment

C. Africa’s Troubles

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Practice Quiz-Mod 38

1. Which of the following is a source of increased productivity growth?� I. increased physical capital� II. increased human capital� III. technological progress�a. I only�

b. II only�

c. III only�

d. I and II only�

e. I, II, and III

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Practice Quiz-Mod 38

2. Which of the following is an example of physical capital?�

a. machinery�

b. healthcare�

c. education�

d. money�

e. all of the above

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Practice Quiz-Mod 38

3. The following statement describes which area of the world? “This area has experienced growth rates unprecedented in history and now looks like an economically advanced country.”�

a. North America�

b. Latin America�

c. Europe�

d. East Asia�

e. Africa

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Practice Quiz-Mod 38

4. Which of the following is cited as an important factor preventing long-run economic growth in Africa?�

a. political instability�

b. lack of property rights�

c. unfavorable geographic conditions�

d. poor health�

e. all of the above

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Practice Quiz-Mod 38

5. The “convergence hypothesis”�

a. states that differences in real GDP per capita among countries widen over time.�

b. states that low levels of real GDP per capita are associated with higher growth rates.�

c. states that low levels of real GDP per capita are associated with lower growth rates.�

d. contradicts the “Rule of 70.”�

e. has been proven by evidence from around the world.

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