Economics of Production and Growth

Here is the summary of the questions we are going to answer in this lesson.

1. What determines the real GDP per capita?
   • Answer: many things including labor productivity.
2. So what determines labor productivity?
   • Answer: many things including capital per worker, human capital, and advances in technology.
3. Let’s start with capital per worker. What determines it?
   • Answer: investment per worker. The more you invest in capital equipment, the more capital each worker gets to work with on average.
4. Then what determines investment per worker?
   • Answer: saving per worker.
5. So is capital the only engine of economic growth?
   • Answer: of course not. Human capital, technological progress, and other things are also as important or even more important.
6. Then you have been wasting our time talking about capital, right? Tell us what causes technological progress.
   • Well, a lot of things. You have to wait.

Reading the following you might think that there are too many equations. However, keep in mind that fundamentally we will be working with three equations:

1. A production function that relates levels of capital and labor used to the level of output produced.
2. A growth accounting equation that shows how the rate of growth of output is accounted for by the rates of growths of capital and labor.
3. A capital accumulation equation that shows how capital grows (accumulates) over time.