Productivity and Quality Management Seventh Lecture.

Productivity and Quality Management

Seventh Lecture

http://meetville.com/quotes/tag/parents/page80

Last Lecture

• Improving Productivity• Productivity Improvement Factors

– 2nd Theory• Organizational Factors• Management Factors• Production Factors• Government Factors• Finance Factors• Government Factors

BACKGROUND

Economic Infrastructure

• The most important economic changes are in employment patterns and the composition of capital, technology, scale and competitiveness

• Employment shifts from agriculture to manufacturing industry have caused an economy wide increase in productivity that has surpassed productivity growth within any one sector in developed countries

• The structural impacts of R&D and technology is another important factor in productivity improvement at macro Level

• Variations in composition of capital also affect productivity

Productivity and Global Economic Growth and Development

9-8

Introduction

About half of all U.S. engineers and computer scientists with Ph.D. degrees were born outside the United States.

In this lecture, you will learn why countries that attract and retain the world’s hardest-working people tend to experience the highest sustained rates of productivity and economic growth.

9-9

Learning Objectives

• Define economic growth

• Recognize the importance of economic growth rates

• Explain why productivity increases are crucial for maintaining economic growth

9-10

Learning Objectives (cont'd)

• Describe the fundamental determinants of economic growth

• Understand the basis of new growth theory

9-11

Did You Know That...

• Only one European nation, Luxembourg, has per capita real GDP higher than the U.S. per capita GDP?

• Per capita GDP has grown more rapidly in some U.S. states than in some European nations?

9-12

How Do We DefineEconomic Growth?

• Economic growth reflects the fact that more of all goods can be produced within the economy.

9-13

Figure 9-1 Economic Growth

Distance of shiftrepresents an increasein productive capacity

In the simple PPC above, an increase in production stemming from economic growth can be represented by an outward shift.

9-14

How Do We DefineEconomic Growth (cont’d)?

• There are two ways to define economic growth, depending upon the final goal.– An increase in real GDP over time– An increase in real per capita GDP over time

• The second definition is superior if the objective of the analysis is a comparison of living standards.

9-15

How Do We DefineEconomic Growth? (cont'd)

• Observation

– India has a real GDP more than fifteen times as large as that of Denmark.

– India’s population is about 200 times greater than that of Denmark.

– India is relatively poor and Denmark is relatively rich.

9-16


• So…Economic Growth is

– Increase in per capita real GDP measured by its rate of change per year

Copyright © 2008 Pearson Addison Wesley. All rights reserved. 9-17

Figure 9-2 The Historical Record of U.S. Economic Growth


Table 9-1 Per Capita Real GDP Growth Rates in Various Countries

9-19


• Limitations in the Definition– Says nothing about the distribution of output– Although per capita real output increases...

• “poor” people may stay poor or become poorer• “rich” people may stay rich or become richer

9-20


• Question

– If your leisure time increases 1 hour/week and your commute time to work increases by 2 hours/week, are you better off?

• Answer

– The per capital real GDP would understate the actual economic growth

9-21


• Is economic growth bad?

– Some psychologists contend that growth makes us worse off.

• The more we grow, the more “needs” are created so we feel worse off

– As with all activities there are costs along with benefits to growth (see Table 9-2).

9-22

Table 9-2 Costs and Benefits of Economic Growth

9-23


• The importance of growth rates

– Do we need to worry about small differences in the economic growth rate?

– The difference between 3% and 4% may not mean much this year, but over time compound interest makes a HUGE difference.


Table 9-3 One Dollar Compounded Annually at Different Interest Rates


3% 4% 5%

$4.38trillion

$7.11trillion

$11.5trillion


• GDP in 50 years at various growth rates starting at $1 trillion

9-26


• The Rule of 70– Tells us the approximate number of years it will

take for some measure (i.e. RGDP, Price Level, Savings Account, etc.) to double, given specific percentage increase.

– If AY is the approximate number of years required to double RGDP, then…

• AY = 70 / annual percentage rate of growth• An economy with a 3% annual growth rate will take

approximately 23 years for RGDP to double

9-27

Factors Affecting the Ability to Grow

• There are 2 main ways in which an economy can grow:– An increase in inputs (i.e. labor and capital)– By increasing the productivity of these inputs


Economic growth = Rate of growth of capital stock + Rate of growth of the labor force +Rate of growth in the productivityof capital and of labor

Productivity Increases: The Heart of Economic Growth


Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics

Figure 9-3 Factors Accounting for Economic Growth in Selected Regions

9-30

Causes of Economic Growth

• Labor Productivity

– Improvements in labor productivity, all other things equal, lead to greater economic growth and higher living standards

– Total real domestic output (real GDP) divided by the number of workers (output per worker)

9-31

Example: Is Official Labor Productivity Growth Overstated?

• BLS reports U.S. labor productivity has increased by at least 21% since 2000.

• Self-employed people, managers, part-time, and temporary employees are excluded.

• Including these forms of labor might reduce productivity to as low as 11%.

9-32

Causes of Economic Growth (cont’d)

• Saving – Higher savings rates lead to higher living standards

in the long-run, because investment and the capital stock will increase

– To have more consumption in the future, you must consume less today and save the difference between your consumption and your income.


Source: World Bank

Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP

9-34

Causes of Economic Growth (cont’d)• Recall:

• Measuring “capital stock” and the “labor force” is not difficult, but measuring “productivity” is…

• New Growth Theory– A theory of economic growth that examines the factors

that determine why technology, research, innovation, and the like are undertaken and how they interact

Economic growth = Rate of growth of capital stock + Rate of growth of the labor force +Rate of growth in the productivityof capital and of labor

9-35


• Technology

– We must look at technology as a separate factor of production

– The greater the rewards, the more technological advances we will get.

9-36


• Aspects of Technology– Research and development (R&D)

• A certain amount of technological advancement occurs from R&D.

• The amount a nation spends on R&D can impact its long-term economic growth.

• For every 1% rise in the stock of R&D in the United States alone, productivity worldwide increases by about 0.25%.

9-37


• Research and development (R&D)

– Patents• A government protection that gives an inventor the

exclusive right to make, use, or sell an invention for a limited period of time (currently, 20 years).

• By encouraging innovation, patents can lead to long-term economic growth.


Source: World Bank

Figure 9-5 U.S. Patent Grants

9-39


• Aspects of Technology

– Free trade encourages the spread of technology.

– An “open economy” can lead to growth


Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers

to International Trade

9-41



– Innovation• An “invention”, by itself, is not a cause of technological

progress

• Transforming an “invention” into something that is useful to humans can cause long-term economic growth

9-42



– The importance of ideas and knowledge• Knowledge, ideas, and productivity

are related; ideas are what drive economic growth.

• Economist Paul Romer suggests that growth can continue as long as we come up with new ideas.


Figure 9-7 The Winnowing Process of Research and Development

9-44



– The importance of human capital• Knowledge, ideas and, productivity are all tied

together.

• Human capital consists of knowledge people acquire.

• Investing in human capital raises living standards and can cause long-term economic growth.

9-45

Economic Development

• Question

– How did developed countries travel paths of growth from extreme poverty to relative riches?

9-46

Economic Development (cont'd)

• Development Economics

– The study of factors that contribute to the economic growth of a country

9-47


• The goal of development economists is to help the 4 billion people with low living standards to join the 2 billion people with moderately high ones.

9-48


• Putting world poverty into perspective

– At least one-half of the world’s population lives at subsistence level.

– 20% of the world lives on less than $1 per day.

– The U.S. poverty level exceeds the average income of one-half the world.

9-49


• Relationship between population growth and economic development

– There are nearly 7 billion people on earth.

– By 2050, according to the U.N., world population will be close to 9.1 billion.

– Growth will occur mainly in developing nations.


Figure 9-8 Expected Growth in World Population by 2050, Panel (a)


Figure 9-8 Expected Growth in World Population by 2050, Panel (b)

9-52

Economic Development (cont'd)• Modern rich nations went through three

stages as they developed…– Agricultural stage

– Manufacturing stage

– Services stage

• It is important that nations that wish to develop specialize in those products in which they have a comparative advantage

9-53


• Keys to economic development– Establishing a system of property rights

– Developing an educated population

– Letting “creative destruction” run its course• Occurs when new businesses ultimately create new

jobs and economic growth after first destroying old jobs, old companies, and old industries.

– Limiting protectionism (i.e. “open economy”)

9-54

Issues and Applications: Winners and Losers in the Brain-Drain Game

• The losers: nations with huge outflows of human capital; this damages prospects for economic growth.

• The winners: countries receiving highly skilled workers who immigrate and provide a “brain-gain.”


Figure 9-9 Nations with the Largest Percentage Emigrations

of Skilled Workers

9-56

Summary Discussion of Learning Objectives

• Economic growth– The rate of economic growth is the annual rate of

change in per capita GDP.

• Why economic growth rates are important– Over long intervals, relatively small differences in

the economic growth rate can produce large disparities in per capita incomes.

9-57

Summary Discussion of Learning Objectives (cont'd)

• Why productivity increases are crucial for maintaining economic growth

– For a nation with a stable population and steady capital growth, productivity growth is the main factor in economic expansion.

9-58


• The key determinants of economic growth – Increases in the labor force, the growth of capital,

and the growth of productivity

• New growth theory – Emphasizes how rewards to innovation contribute

to higher growth rates

9-59


• Fundamental factors that contribute to a nation’s economic development

– Nations that encourage education, have a strong system of property rights, allow creative destruction, and avoid protectionism have higher levels of productivity and economic development.

9-60

Lecture Summary

• How Do We Define Economic Growth?• Productivity Increases: The Heart of Economic

Growth• Saving: A Fundamental Determinant of Economic

Growth• New Growth Theory and the Determinants

of Growth• Productivity and Economic Development

http://www.google.com.pk/imgres?imgurl=http://24.media.tumblr.com/tumblr_m2mvo4DTUY1r75xe0o1_500.jpg&imgrefurl=http://www.islamicteachings.org/forum/topic/14674-valuable-islamic-quotes/page-12&h=333&w=500&tbnid=Bxd6XN8jZQXGbM:&zoom=1&docid=L2VAYrgLhnBQfM&hl=en-PK&ei=YkEaVejAEI_3av2bgqgM&tbm=isch&ved=0CD8QMyg3MDc4ZA

Improving Productivity

Productivity and Quality Management Seventh Lecture.

Documents

productivity growth

global economic growth

real gdp growth rates

defineeconomic growth

economic growth99

real gdp higher

important economic changes

basis of new growth