Tuesday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 9 The Real Economy in the Long Run
Chapter 25 of 36 Production and Growth
Section 11 of 23
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Figure 1 - Illustrating the Production Function
This figure shows how the amount of capital per worker influences the amount of output per worker.
Capital includes
· human capital, knowledge and skills
· natural resources
· technology level
As the capital per worker increases the curve becomes flatter because of diminishing returns to capital.
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Things government can promote and strengthen to increase productivity and living standards include
1· saving and investment
2· investment from abroad
3· education
4· health and nutrition
5· property rights and political stability
6· free trade
7· research and development
8· population growth
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1· saving and investment
Suppose a government pursues policies that raise the nation's saving rate.
The goal is percentage of GDP saved increases and percentage spent on consumption decreases.
When a nation saves more
· fewer resources are needed to produce current consumption goods
· more resources are available to produce capital goods, used for making future consumption goods
As a result the capital stock increases, productivity rises, and GDP grows more rapidly.
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The high GDP growth rate doesn’t continue indefinitely.
Return on capital faces diminishing returns as the stock of capital rises.
Over time the amount of increased output resulting from an additional unit of capital falls.
When workers already have a large quantity of production capital adding an additional unit of capital only slightly increases their productivity.
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Figure 1 shows how the amount of capital per worker determines the amount of output per worker.
Because of diminishing returns, increasing the saving rate and capital per worker leads to a substantially higher growth for only a limited period.
The benefits from additional capital become smaller over time as the productivity growth rate slows down.
In the long run a higher saving rate leads to a higher productivity and income level but not to higher rate of productivity and income growth.
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Because of diminishing returns to capital it is easier for a country to grow fast if it starts out poor.
In poor countries, workers lack the most basic tools and have very low productivity.
Small amounts of capital investment substantially raise workers' productivity.
Workers in rich countries already have large amounts of capital with which to work.
With the amount of capital per worker already high additional capital has a relatively small productivity effect.
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As amount of capital is increased poor countries typically grow at faster rates than rich countries.
From 1960 to 1990, the United States and South Korea had a similar percent of GDP go to capital investment.
During this time period, per year
· the United States experienced only small growth average of about 2 percent
· South Korea experienced huge growth average of more than 6 percent
In 1960 South Korea had less than one-tenth the GDP per person of the U.S. level, partly because previous investment in capital had been low.
With a small initial capital stock the benefits of capital accumulation were much greater in South Korea, so South Korea subsequently had a higher growth rate than the U.S.
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Other than war time, what time period had the highest economic growth rate in U.S. history?
Grok:
The highest sustained economic growth rates in U.S. history occurred during the post-World War II boom of the 1950s and 1960s, with average annual real GDP growth of approximately 4.2% in the 1950s and 4.5% in the 1960s — the strongest peacetime decades on record.
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Were these economic booms fueled by a high savings rate?
Grok:
The post-WWII economic boom of the 1950s and 1960s was supported by relatively high personal saving rates compared to later decades.
The personal saving rate averaged around 9–12% of disposable income in the 1950s and often stayed above 10% through much of the 1960s, consistently over 10% in the broader 1960s–1970s period).
This was notably higher than the sub-5% rates that became common in the 2000s or recent years.
Gross national/net saving as a share of income or GDP was also stronger in these decades —net savings around 10.7% of gross domestic income in the 1950s–early 1960s— providing a solid pool of funds for domestic investment in housing, infrastructure, factories, and consumer durables.
However, the boom was not primarily fueled by a classic high-saving, low-consumption tradeoff as emphasized in basic Solow-style capital deepening.
Much of the initial surge came from releasing wartime pent-up demand after years of rationing and forced high saving — personal saving rates had spiked above 20% during WWII.
Households drew down some accumulated assets while still maintaining positive saving flows.
Growth was driven equally by rapid productivity gains from wartime innovations, a young and expanding workforce, suburbanization, rising consumer confidence, and the U.S. position as the dominant industrial economy.
In short, the era combined elevated saving and investment with strong consumption growth, enabling both capital accumulation and higher living standards rather than relying on suppressed consumption alone.
This mix helps explain the strong 4%+ average real GDP growth in a peacetime context.
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the benefits of capital accumulation
shihon chikuseki no riten