EDEV 311: ECONOMIC
DEVELOPMENT
SESSION 3: PRODUCTION AND GROWTH
HOW ECONOMIC GROWTH DIFFERS AROUND
THE WORLD
PRODUCTION & GROWTH AROUND THE WORLD
A country’s standard of living depends on its ability to produce goods
and services.
Within every country there are enormous changes in the standard of
living over time considering numerous economical factors.
Living standards, as measure by per capita Real GDP, vary
significantly among nations.
The most developed countries have Real per capita GDP that is at
least 10 to 20 times more compared to that of the poorest countries.
PRODUCTION & GROWTH AROUND THE WORLD
THE PROCESS OF CREATING A HIGH
LIVING STANDARD IS KEYED TO
PRODUCTIVITY
ECONOMIC GROWTH AROUND THE WORLD
THE RULE OF 70
ANNUAL GROWTH RATES THAT SEEM SMALL BECOME LARGE WHEN COMPOUNDED FOR
MANY YEARS.
*COMPOUNDING REFERS TO THE ACCUMULATION OF A RATE OVER A
CERTAIN PERIOD OF TIME.
THE RULE OF 70 PROVIDES THAT THE VALUE OF A VARIABLE WILL DOUBLE IN
APPROXIMATELY (70/ANNUAL GROWTH RATE) YEARS.
THE RULE OF 70
EXAMPLE:
The amount of Php:5,000.00 invested at seven percent (7%) interest per
year, will double in size in 10 calendar years.
SOLUTION:
70 / 7 = 10
PRODUCTIVITY: ITS ROLE & DETERMINANTS
To understand the large variance in the living standards of countries we must
understand and focus on the PRODUCTION of goods and services.
PRODUCTIVITY refers to the quantity of goods and services that a worker can
produce for each hour of work
The inputs used to produce goods and services are called the FACTORS OF
PRODUCTION
HOW PRODUCTIVITY IS DETERMINED
THE FACTORS OF PRODUCTIONS ARE:
1. PHYSICAL CAPITAL
2. HUMAN CAPITAL
3. NATURAL RESOURCES
4. TECHNOLOGICAL KNOWLEDGE
• CAPITAL would mean the produced
factor of production, i.e. capital is an
input into the production process that
in the past was an output from
production.
FACTORS OF PRODUCTION – PHYSICAL CAPITAL
The stock of equipment and structures that are used to produce
goods and service.
EXAMPLES:
Tools used to build or repair automobiles
Tools used to build homes or buildings
Buildings (e.g. office, schools, condominiums)
FACTORS OF PRODUCTION – HUMAN CAPITAL
The economist’s term for the KNOWLEDGE & SKILLS that
workers acquire through education, training and experience.
Like physical capital, human capital raises a country’s ability to
produce goods and services
FACTORS OF PRODUCTION – NATURAL RESOURCES
Inputs used in production that are provided by nature, such as
land, rivers and mineral deposits.
FACTORS OF PRODUCTION – TECHNOLOGICAL KNOWLEDGE
The understanding of the best ways to produce goods and
services.
TECHNOLOGICAL KNOWLEDGE refers to the society’s
understanding about how the world works while HUMAN
CAPITAL refers to the resources expended in transmitting this
understanding to the labor force.
FACTORS OF PRODUCTION
ECONOMIC GROWTH & PUBLIC POLICY
ECONOMIC GROWTH & PUBLIC POLICY
Public or government policies, laws, traditions and institutions are
critical to transforming resources into useful output.
Governments can do so many things to encourage or impede the
attainment of high living standards.
ECONOMIC GROWTH & PUBLIC POLICY
Government policies may include:
Encourage savings and investments
Encourage education and training
Establish secure property rights and political stability
Promote free trade policies
Control of population growth
Promote research and development
GOVERNMENT POLICY:
ECOURAGE SAVINGS & INVESTMENTS
One way to raise future productivity is to invest more
current resources in the production of capital. Thus,
governments can encourage capital accumulation through:
from domestic sources by imposing low taxes on
interest and dividend incomes
From foreign sources by making such capital secure
and welcome domestically
GOVERNMENT POLICY:
ECOURAGE EDUCATION & TRAINING
Education is as important as investment in physical
capital.
Most likely, governments make it necessary for their
countries to provide free basic and tertiary education and
trainings (e.g. TESDA) so that the workforce can acquire
the specialized skills leading to higher productivity.
GOVERNMENT POLICY:
ESTABLISH SECURE PROPERTY RIGHTS & POLITICAL STABLITY
Property rights refer to the ability of the people to
exercise authority over the resources they own.
An economy-wide respect for property rights is an
important pre-requisite for the price system to work.
It is necessary for investors to feel that their investments
are secure and safe from political instability.
GOVERNMENT POLICY:
PROMOTE FREE TRADE
To exploit comparative advantage and maximize
production and efficiency, it is important for countries to
have the opportunity to sell its products abroad and be
able to purchase from lower-opportunity cost producers.
GOVERNMENT POLICY:
CONTROL POPULATION
Population is a key determinant of a country’s labor force.
Large populations tend to produce greater total GDP. The
caveat however is that higher GDP does not mean higher
well-being for the person, thus, a GDP per person is a
more accurate measurement considering that a high
population growth reduces the GDP per person.
GOVERNMENT POLICY:
RESEARCH & DEVELOPMENT
The advancement of technological knowledge has led to
higher standards of living. Technological advancement
comes from private firms and public agencies (e.g. Public-
Private Partnerships)
Government’s role is to encourage the research and
development of new technologies through research grants,
tax breaks, and the patent system.
THANK YOU !
-OLFU SUMMER 2020
