PRODUCTION AND GROWTH

ECON 101: ECONOMIC DEVELOPMENT

Submitted to:
Joan Grace Tolentino

Submitted by:
Aunzo, Ivy Jean Q.
Bayon-on, Joyce
Flores, Beberly
Jecupe, Eya
Traya, Alejandro
Zunio, Jogelyn

BSA AS3

February 2025
Understanding Economic Growth and Productivity
Introduction

Economic growth is a crucial factor in determining a nation's prosperity and

overall well-being. It refers to the increase in a country’s production of goods and
services over time, typically measured by Gross Domestic Product (GDP).
Understanding the factors that drive economic growth helps policymakers and
economists formulate strategies to improve living standards, reduce poverty, and
enhance global competitiveness. This report explores the key components of
production and economic growth, the role of policies, and the challenges nations
face in sustaining long-term growth.

Production & Growth

Living Standards and Growth Rates Around the World

A country’s standard of living depends on its ability to produce goods and services.
The standard of living is measured by personal incomes and the total market value
of a nation’s production per person (per capita GDP). The standard of living varies
across countries and regions. Over time, some countries experience economic
growth while others stagnate. For example, Singapore had low incomes in 1960 but
is now highly developed. Rich countries may be overtaken by faster-growing
developing nations.

Why Productivity Matters for Living Standards

A country’s standard of living is determined by its productivity. Productivity is

measured using the following formula:

Where:

 Real GDP represents the total output of goods and services in an economy.
 Labor input represents the number of workers or labor hours.

Higher productivity leads to higher incomes and better living standards.

. Determinants of Productivity and Growth Rate

Productivity depends on several factors:

Technological knowledge (A) – Advances that improve production methods.

Physical capital per worker (K/L) – Machines, tools, and equipment.

Human capital per worker (H/L) – Skills and education.

Natural resources per worker (N/L) – Availability of raw materials.

The production function expresses the relationship between these factors and
output:

Dividing by (number of workers) gives:

This equation shows that output per worker depends on technological progress,
capital, human capital, and resources.

Economic Growth vs. Economic Development

Economic growth refers to an increase in real GDP and per capita income over time.
Economic development, however, includes broader improvements in well-being,
such as social, cultural, and political changes. Development involves:

 Changes in resource supply.

 Capital formation.
 Population composition.
 Improvements in technology and efficiency

Short-Run and Long-Run Growth

Short-Run Growth: In the short run, an economy operates within the Production
Possibilities Curve (PPC). The goal is to utilize all resources for full employment.
Long-Run Growth: In the long run, economic growth shifts the PPC outward,
indicating an increase in productive capacity. This is achieved by investing in capital,
human capital, and technology.
GDP Per Capita and Productivity Measures
GDP Per Capita: This measure indicates living standards. If GDP grows faster than
the population, living standards rise. GDP Per Capita=Real GDP/ POPULATION
GDP Per Worker: This measure indicates productivity levels. Higher productivity
results in higher incomes. GDP Per Capita=Real GDP/ LABOR FORCE

Determinants of Economic Growth

Several elements drive economic growth and determine a nation's ability to increase
its GDP over time. These include:

1. Saving and Investment

Capital accumulation is essential for economic expansion. When households save,

funds become available for investment in capital goods, such as factories, tools, and
infrastructure. Higher investment leads to greater productivity and economic output.
Governments and financial institutions play a vital role in facilitating this process
through policies that encourage savings and capital formation.

Diminishing Returns and Catch-Up Effect

Economic growth follows the principle of diminishing returns, where each additional
unit of capital investment yields progressively smaller increases in output. However,
less developed countries often experience a catch-up effect, where they grow faster
than developed nations because they can adopt existing technologies and best
practices.

2. Foreign Investment

International investment, including Foreign Direct Investment (FDI) and portfolio

investments, boosts economic growth by introducing capital, technology, and
expertise. Countries that attract foreign investment benefit from job creation,
infrastructure development, and knowledge transfer.

3. Free Trade

International trade allows nations to specialize in industries where they have a

comparative advantage, leading to increased efficiency and economic expansion.
Free trade policies, reduced tariffs, and open markets encourage innovation and
competition, ultimately fostering growth.

4. Education and Human Capital

A well-educated workforce is essential for increasing productivity. Investment in

education equips individuals with skills that enhance their ability to innovate and
adapt to technological advancements. Nations that prioritize education see higher
economic growth rates due to improved labor market efficiency.

5. Property Rights and Political Stability

A stable political environment and strong legal institutions are critical for economic
growth. When individuals and businesses have secure property rights, they are more
likely to invest in productive activities. Political instability, corruption, and weak legal
frameworks deter investment and slow economic progress.

6. Research and Development (R&D)

Innovation is a key driver of economic progress. Nations that invest in research and
development benefit from new technologies, improved production processes, and
higher productivity. Governments often support R&D through grants, tax incentives,
and partnerships with private institutions.

7.Population growth affects living standards in three ways:

1. Stretching Natural Resources – More people increase demand for

resources, but technology offsets negative effects.
2. Diluting Capital Stock – Shared resources like factories and schools lower
productivity and education quality.
 3. Promoting Technological Progress – More people contribute to innovation,
boosting economic growth.

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