Chapter 3 Production and Growth

LECTURE VIDEO 学习视频6:

b. Investment from Abroad

Saving by domestic residents is not the only way for a country to invest in new capital. The other way is investment by foreigners.

Foreign direct investment occurs when a capital investment is owned and operated by a foreign entity.

Foreign portfolio investment occurs when a capital investment is financed with foreign money but operated by domestic residents.

Some of the benefits of foreign investment flow back to foreign owners. But the economy still experiences an increase in the capital stock, which leads to higher productivity and higher wages.

c. Education

Since productivity is higher when the average worker has more human capital, government can increase productivity by promoting education, a way to invest in human capital. 

Investment in human capital also has an opportunity cost. Spending a year in school requires sacrificing a year's wages now to have higher wages later.

In less-developed countries, this opportunity cost is considered to be high; as a result, children often drop out of school at a young age.

Investment in human capital conveys positive externalities—new ideas generated by a best educated person can benefit many other people in society.

Many poor countries also face a “brain drain”—the best educated often leave to go to other countries where they can enjoy a higher standard of living.

d. Health and Nutrition

Human capital can also be used to describe another type of investment in people: expenditures that lead to a healthier population. Other things being equal, healthier workers are more productive.

Making the right investments in the health of the population is one way for a nation to increase productivity.

Investing in human capital—either through education or improving health and nutrition—can indeed lead to higher incomes in the long run.  But it is equally true that countries with higher incomes can afford to devote more resources to schooling or improving health & nutrition.  

e. Property Rights and Political Stability

Policymakers can foster economic growth by protecting property rights and promoting political stability. 

Property rights  refers to the ability of people to exercise authority over the resources they own.  And, courts in an economy serves an important role of enforcing property rights.

When the justice system doesn't work very well, contracts are hard to enforce, fraud and corruption often go unpunished, while even sometimes firms must bribe government officials for permits to do business in some countries. Under these circumstances, it will discourage domestic saving and investment from abroad.

One threat to property rights is political instability. When revolutions and coups are common, domestic residents have less incentive to save, invest and start new business and foreigners have less incentive to invest in the country.

Hence, a country with an efficient court system, honest government officials, and a stable constitution will enjoy a higher economic standard of living.

f. Free Trade

Some countries have tried to achieve faster economic growth by avoiding transacting with the rest of the world.

Most economists today believe that countries adopting the outward-oriented policies could be better off. Because trade allows a country to specialize in what it does best and thus consume beyond its production possibilities.

The amount a nation trades is determined not only by government policy but also by geography.

Countries with good, natural seaports find trade easier than countries without this resource.

g. Research and Development

The primary reason why living standards have improved over time has been due to large increases in technological knowledge.

Because knowledge can be considered a public good; that is, once one person discovers an idea, the idea enters society's pool of knowlegde, and other people can freely use it.

Most technological progress come from private research by firms and individual inventors. Hence, governments need implement some policies to promote these efforts into research and development.

The patent system encourages research by granting an inventor the exclusive right to produce the product for a specified number of years.

Moreover, government can promote the creation of new technological information by providing research grants and providing tax incentives for firms engaged in research.