Activator Chapter 25 pg. 549

1. Activator Chapter 25 pg. 549 What is the difference between a rich country and a poor country in terms of average income? How are these differences reflected in quality of life? How has per capita GDP grown for U.S. citizens? How does the average income today compare to the average income a century ago? How do growth rates vary from country to country?

2. Tennis Ball Simulation • At what number of workers did we have the most total output? • At what number of workers did we have the highest increase in marginal product of labor? • When did we have too many workers?

3. Chapter 25 - Production and Growth • Production - act of creating an economic product that can satisfy a want or need • Economic growth - the constant increase in the capacity of the economy to satisfy the wants and needs of the members of society.

4. Economic Growth Around the World • Productivity – the amount of output produced for each unit of labor input • Real GDP per person (GDP per capita) – average income per person, shows that living standards varies from country to country • Growth rate - how rapidly real GDP per person grows in a typical year • U.S. real GDP $3,752 in 1870 and $44,260 in 2006; 1.83% growth rate per year

5. Productivity: its Role and Determinants • Why is productivity so important? • Key determinant of living standards • High production of goods and services per person leads to high per capita real GDP = high standard of living • “What can each member of our society produce relative to another society?”

6. Productivity: its Role and Determinants • How productivity is determined? • Physical Capital • Human Capital • Natural Resources • Technological Knowledge

7. Productivity: its Role and Determinants • How productivity is determined? • Physical capital (capital goods)– the stock of equipment and structures used to produce goods and services • Better inputs, better production levels • Human capital - knowledge and skills that workers acquire through education, training, and experience

8. Productivity: its Role and Determinants • Natural resources (land)– raw materials created by nature which are converted into the production of goods and services • Provided by nature, such as land, rivers, and mineral deposits • U.S. has a large supply of land fit for agriculture • Middle East oil supplies • Renewable Resources - are natural resources that can be reproduced or sustained • Trees, energy (wind, solar power), livestock, etc. • Nonrenewable Resources - are natural resources that are limited in supply. • Coal, petroleum, gold, etc.

9. Productivity: its Role and Determinants • Technological knowledge - society’s understanding of the best ways to produce goods and services in light of scarcity • Changes in farming; a small number of farmers can perform agricultural tasks, which 200 years ago required a large number of farmers to complete • Pushes PPF outward and to the right • Technology allows labor inputs to discontinue production of one good and be made available to produce other goods and services

10. What is the difference between production and productivity? • Production – an economy’s capacity to produce “stuff” • The physical output in the production process • A country can produce 10 cars • Productivity – how efficient the economy is at producing “stuff” • How much time, people, money, etc. does it take? • For example, 10 cars/day or 10 cars/1 worker or 10 cars/$10,000 labor cost, etc. = =

11. Economic Growth and Public Policy • Saving and Investment - a society can change the amount of capital it has through saving and investing • Invest in capital today will raise future productivity tomorrow (capital deepening) • Tradeoff - devote fewer resources to produce goods and services for current consumption • Sacrifice consumption in the short run to enjoy higher consumption in the long run

12. Diminishing Returns and the Catch-Up Effect • Diminishing returns – the benefit from an extra unit of an input declines as the quantity of input increases • Adding additional inputs will increase outputs (production); over time the rate of returns will begin to decline • Catch-up effect – countries that start off “poor” tend to experience relatively rapid short term growth through relatively small investments in capital goods • Similar to a “most-improved” student vs. a “top-of-the class” student • Growth in 2011: • U.S. – 1.5% • China – 9.5% • India – 7.8% • Iraq – 9.6%

13. India Video • http://www.youtube.com/watch?v=1k7ypBocrKQ

14. Application – The Production Function 160 • At what number of laborers does the firm experience diminishing marginal returns? ______________ • At what number of laborers does the firm experience negative marginal returns? ________________

15. Application – The Production Function 160 • At what number of laborers does the firm experience diminishing marginal returns? ______________ • At what number of laborers does the firm experience negative marginal returns? ________________

16. Application – The Costs of Production 160 • At what number of laborers does the firm experience diminishing marginal returns? ______________ • At what number of laborers does the firm experience negative marginal returns? ________________

17. Application – The Production Function 160 • At what number of laborers does the firm experience diminishing marginal returns? ______________ • At what number of laborers does the firm experience negative marginal returns? ________________

18. Application - The Production Function 160 • At what number of laborers does the firm experience diminishing marginal returns? _______6______ • At what number of laborers does the firm experience negative marginal returns? ________11_______

19. Application - The Production Function 160 • At what number of laborers does the firm experience diminishing marginal returns? _____________ • At what number of laborers does the firm experience negative marginal returns? _______________

20. Application - The Production Function Inc. Dim. Neg. 160 Inc. Dim. Neg. • At what number of laborers do we observe diminishing marginal returns? _______6______ • At what number of laborers do we observe negative marginal returns? _________11______

21. Investment From Abroad • Foreign direct investment – a capital investment that is owned and operated by a foreign country • i.e. U.S. factory in another country, such as Nike in Vietnam • Foreign country increases domestic GDP, but takes some income • Foreign portfolio investment – financial investment by a foreign country in a domestic country • Chinese financial investment in U.S. company • Foreign country expects a return on investment, takes a portion of profit with them

22. Apple Video and China Bonds • http://www.youtube.com/watch?v=zqL2nS6GljY&list=PLC3B5A63929ED29C0&index=13&feature=plpp_video • http://www.youtube.com/watch?v=T1dDIrOCbUo&list=PLC3B5A63929ED29C0&index=16&feature=plpp_video

23. Nike Stossel Outsourcing Video • http://www.youtube.com/watch?v=M5uYCWVfuPQ&feature=watch-vrec • http://www.youtube.com/watch?v=5HMjqQaWqes • http://www.youtube.com/watch?v=0VaHmgoB10E

24. Education • Investments in human capital are at least as important as those in physical capital • U.S. , each year of school raises a person’s wage by 10 percent • One way government policy can enhance the standard of living is through policies to promote education • Creates positive externalities – the effect of one person’s actions on the well-being of a bystander • Brain Drain – emigration of many of the most highly educated workers to rich countries • Leaves native country worse off • Reduces the human capital of native country

25. Health and Nutrition • Healthier workers are more productive • Public policy aimed toward improving health of a nation can raise the standard of living • Height is an indicator of health and productivity of a nation • North Korean’s are 6 inches shorter than South Korean’s

26. Google Video http://www.youtube.com/watch?v=z8wqS7VkAcw&list=PL259C0982150A872C&index=9&feature=plpp_video

27. Property Rights and Political Stability • Property rights and political stability create confidence in businesses and individuals • Property rights – ability to own and control resources • Political stability – refers to a government that is secure and reliable

28. Free Trade • Inward-oriented policies – increase productivity and living standards within the country by avoiding interaction with the rest of the world • Outward-oriented policies – international trade and globalization can benefit the well-being of the economy

29. Research and Development • Technological progress has a major impact on living standards • Governmental policies aimed at creating technological knowledge can improve the productivity and standard of living of a nation • U.S. – funding for NASA aerospace, USDA farming methods, clean energy research • Research grants - National Science Foundation, National Institutes of Health • Tax breaks incentives for firms to research and develop • Patent system provides incentives for individuals to engage in research

30. Population Growth • Larger population, larger labor force, consumer base and pool of human capital • Diluting Capital Stock – strain on capital for countries with large population growth • Developed countries tend to have a slower population growth than that of undeveloped countries • U.S and Western European about 1% per year • African countries grow 3% per year

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32. Paper Airplane Simulation • With a group of four, you will form a country that builds paper airplanes. • As a group, agree on a simple design. Your airplanes must be made of an 8 ½ x 11 piece of paper. • Next choose your country’s name. This will be printed on both sides of the plane’s fuselage. Shift 1Materials: 1 Pencil 2 desks 20 sheets of paper Procedure: Each worker must work alone to make his or her airplanes. The materials must be shared. Each worker must test their own airplanes. One of your workers the quality control manager (who cannot participate) should inspect the airplanes and record the data. Shift 2Materials: 1 Pencil 2 desks 20 sheets of paper Procedure: Before this shift begins, work as a group to break the production process into a series of steps. - Folding the paper - Writing the Company Name Record the results. Shift 3Materials: Using the costs listed on the productivity chart, decide as a group what additional capital goods you will purchase. You have $10.00. You may acquire a maximum of 4 desks, 40 sheets of paper and 10 pencils. (You can also hire a new laborer – QCM) Procedure: Before this shift begins, determine the most efficient manner of producing the airplanes

34. Paper Airplane Simulation Reflection Questions • What shift were you most productive? • Why were you most productive during that shift? • What effect did investing in additional capital goods in shift 3 have on productivity? • What investment allowed your group the most growth? Explain • Why did your group experience periods of non-productivity? • If instead of making an additional capital investment in shift 3, what would have happened if the company laid off one or two workers, how would that have affected production? • How could new technology have affected your productivity?

35. Article – A Picture is Worth a Thousand Statistics, pgs. 552-553 Describe the following about three countries listed in the article: GDP per person People living in poverty Education Survival rate, ages 65-84 How do each of the pictures represent the standard of living for each country?

36. Measuring Capital, pgs. 558 - 559 • What is the difference between the productivity of a Mexican worker in their native country and one that migrates to the United States? • Why are they more productive? • What is defined as natural capital + produced capital according to World Bank’s environmental economics department? • What are the intangible factors of wealth? • What constitutes the largest share of wealth in virtually all countries? • Why are rich countries rich according to this? • What is the average score of the 30 wealthiest countries? • Why are natural resources more valuable in rich countries? • How is it possible for a country to have negative intangible capital?

37. Promoting Human Capital, pg. 564 • What did Vandelson Andrade use to spend his time doing instead of attending class? • What gave him the incentive to show up for class? • How are Latin American countries trying to improve their human capital? • How is the government program changing the health of their family?

38. Chapter 25 Mankiw Review • a. Northcountry, because it has the largest real GDP per person. b. Eastcountry, because it has the largest growth rate. c. Westcountry is the poorest and probably has the least capital. d. No. Because of diminishing returns to capital, the additional growth from increasing capital declines as a country has more capital. e. Human capital emits a positive externality, which can benefit the masses. R&D can become a public good also benefiting the masses. f. Westcountry, because it is currently the poorest and could easily benefit from additional capital. It may have trade restrictions (inward oriented policies), a corrupt or unstable government, few courts and a lack of established property rights, etc. g. ($15,918 – $15,468)/$15,468 = 0.029 = 2.9%

39. Chapter 25 Mankiw Review 2. a. Cook = labor, diploma = human capital, recipes = technological knowledge/human capital, stove and utensils = physical capital, rabbit meat = land/natural resources. b. Recipes (technological knowledge/human capital) never wear out. Laborers die. The stove and utensils wear out slowly. The rabbit meat is used up (although it is probably renewable). 3. a. Encourage saving and investment, investment from abroad, education, free trade, research and development, protect property rights and establish political stability. b. Property rights and political stability are necessary for there to be any incentive to save, invest, trade, or educate.

40. Homework Review: List the concept that would best describe each of the scenarios below and explain how it relates: • India experienced a rapid growth of 9% real per capita GDP growth rate from 2009 to 2010, while the United States only experienced a 2% growth rate. • Catch Up Effect.  • Explanation - India experienced a larger growth rate than that of the United States relative to their status as an underdeveloped nation. While India may have experienced a larger growth rate in 2009, it was due at least in part to the catch-up effect, which states that it is easier for a country to grow fast if it starts out relatively poor. • Nike sets up a factory in Vietnam to produce shoes. • Foreign Direct Investment • A foreign direct investment was made when Nike put a part of their business in Vietnam. This added to the GDP of Vietnam and the GNP of the United States. • China invests 4 trillion dollars in the South Korean Won. • Foreign Portfolio Investment • A foreign portfolio investment was made when China invested their money in government bonds for South Korea. This makes funds available for the country that borrows and allows for investment in capital goods. China’s motivation for this would be a return on their investment in the way of profit. • The United States makes student loans available to prospective U.S. college students at a low rate of 3.2% interest. • Investment in education • Investments in education are one of the most important aspects of improving the productivity of a nation. Human capital is a way for an economy to improve its productivity, its per capita real GDP and thus its standards of living. The U.S. makes available educational opportunities in order to invest in the human capital of its people.

41. Homework Review: List the concept that would best describe each of the scenarios below and explain how it relates: • Google allows their workers to work out for free at their facility. The workers are also privy to full course meals, which are paid for by Google. • Health and Nutrition • Studies have shown that healthier workers are more productive. Google provides many fringe benefits to their workers in order to increase their productivity. This will lead to the growth of their company . • North Korean's are typically 6 inches shorter than their South Korean counterparts. • Health and Nutrition • Studies show a correlation between height and nutrition. Taller workers are generally more productive because they are healthier. If North Korea directed policies at improving their nutrition would potentially see a response in increased productivity and ultimately growth.

42. Homework Review: List the concept that would best describe each of the scenarios below and explain how it relates: • In portions of Iraq, their is the looming threat of kidnappings upon American employees and their families. • Property Rights and Political Stability • Investments in a country, either direct or portfolio, are in large part related to the stability in the political and justice system. If American’s feel the well-being of their families and businesses are at risk, they will be unlikely to invest in the country. • The 2002 United States Steel Tariff imposed a 30% tariff on a variety of imported steel products for a period of three years. • Free Trade – Inward-Oriented Policies • Countries that wish to protect infant-industries or domestic companies will at times impose tariffs on imported products. The U.S. steel tariff was an example of a tariff to dissuade companies from importing cheaper goods from other countries.

43. Homework Review: List the concept that would best describe each of the scenarios below and explain how it relates: • In the late 1970's, Sri Lanka reduced quantitative control of imports in their country in order to stimulate their economy. • Free Trade – Outward-Oriented Policies • Countries that wish to stimulate their economy can do so by adopting policies geared towards globalization. Sri Lanka’s loosening of policies over imports of goods was an example of the gains that can be made from trade. • The U.S. government provides a 20 million dollar grant to a biotechnology company in order find viable alternatives to typical fuel sources. • Research and Development • R&D is an important way for countries to experience improved products and innovation. Innovation is the improvement of an existing technology, which can increase the output per unit of labor. This can increase productivity and growth of a nation. The U.S. aims many of its policies towards R&D as a way to improve the living standards of its people. • China has an important role in the global economy as a result of the number of people in their country. • Population • At times, the sheer number of people in a country can have an effect on productivity. The larger the population, the larger the pool of human capital. China’s role in the global economy is in part due to their large consumer base of over a billion people. In addition, they have many resources that have made them a major player in the global economy.

44. Binder Check • Chapter 25 Review • North Korea Video Questions • Notes • Daily Tens

45. Extra Credit • Fill out the following table: • At what point do diminishing returns take place in the above table? • At what point do negative returns take place? • Draw a production function that would resemble the above concept.

46. Poster Requirements: 1) Title 2) Picture 3) Content Economic Growth and Public Policy pgs. 560-572 • Group 1 – Saving and Investment Capital, tradeoffs, scarce resources, capital accumulation, saving and investing and growth • Group 2 – Diminishing Returns and the Catch-up Effect Saving, capital goods, productivity, GDP growth, diminishing returns, diminishing returns and saving rate, catch-up effect, example from book; U.S. and South Korea, and school • Group 3 – Investment From Abroad Investment by foreigners, Ford example, foreign direct investment and foreign portfolio investment, effect of investment from abroad, GDP, GNP, growth, influence on technology, World Bank and IMF) • Group 4 – Education Investment in human capital, schooling and wages, opportunity cost, positive externalities, educated persons, brain drain • Group 5 – Health and Nutrition Healthy workers, economic growth and nutrition, Great Britain example, height and malnutrition, South Korea example, taller workers, Sub-Saharan Africa, health and wealth • Group 6 – Property Rights and Political Stability Property rights, division of production, market prices and invisible hand, mining company example, justice system in developed and undeveloped nations, political instability, economic prosperity and political stability • Group 7 – Free Trade Inward-oriented policies, infant-industry argument, outward-oriented policies, Argentina Philadelphia example, geography and trade • Group 8 – Research and Development Technological knowledge and living standards, examples of technology, private research and public goods, research and development, government and technology, Air Force and NASA example, government advances in knowledge, patent system as an incentive • Group 9 – Population and Growth Importance of a large population, Stretching natural resources, Malthus’ argument /logic and the fallacy of his argument, population and growth, population and human capital, population around the world, China population control, children and opportunity cost, population and technological progress, population and technological advance, Michael Kremer argument