Chapter 3 Production and Growth

LECTURE VIDEO 学习视频5:

a. Saving and Investment

A society can improve productivity by increasing the stock of capital.

While, capital is being produced with other resources in the past. Thus, to stock more capital ,it requires the society to allocate more scarce resources to producing capital goods.

However, there is an opportunity cost of doing so. If resources are used to produce capital goods, fewer goods and services are produced for current consumption.

Thus, to invest more in capital, the society must consume less today and save more of its current income.  

Remember one of the 10 principles:  people face tradeoffs.  In the case of accumulating more capital, people face the tradeoff between current consumption and higher future consumption. 

To conclude, the economic growth and improvements on living standards and productivity arising from capital accumulaton requires that society sacrifice consumption of goods and services in the present to enjoy higher consumption in the future.

Encouraging saving and investment is one way that a government can increase the economy's standard of living and promote economic growth in the long run.

When the nation saving more, fewer resources are needed to make consumption goods and more resources are available to make capital goods. 

As a result, the capital stock increases, leading to rising productivity and more rapid growth in real GDP.

1) Diminishing returns to capital

As the capital stock rises, the extra output produced from an additional unit of capital will fall.

If workers don't have very much capital, giving them more will increase their productivity a lot.  If workers already have a lot of capital, giving them more won't increase their productivity very much.  

In the long run, a higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables. 

2) The catch-up effect

the property whereby poor countries tend to grow more rapidly than rich ones 

Poor country starts with little stock of capital per worker while rich country already stock a larger quantity of capital. But thanks to diminishing returns, the increase in capital per worker has a bigger effect in the poor country than in the rich country.  

As a result, the poor country enjoys a higher growth rate than the rich country when both countries have the same technology and other inputs, called the“catch-up effect.”