Day 30 The production approach to economic growth

The production approach to economic growth

For the past decade in world history, we can clearly observe the pattern that most of the industrial countries have been experiencing economic growth. Alternatively, the long-run economic expansion. The trend is straight-forward because we are definitely enjoying better living standard than our grandparents in 1970th. The diversify of household commodities and renovation of technology made our life much more comfortable. These improvements are based upon the growth on our economic pie. It is important for us to comprehend the factors that affect economic growth, so we can allocate limited resources more efficiently to achieve a better future.

The economic growth is measured by the proportion changed in a country’s real gross domestic production(GDP), or for more precisely assessment, the real GDP per captia(per person). It provides the general identification of the economy’s well-being, hence the decision makers can adjust resources distribution strategy aim on short-term or long-term goals. This is important due to the scarcity principle, the resources are limited. Therefore, the current benefit needs to be sacrificed for the future return. There are two components that define the real GDP per person in a country: the average labor productivity times the share of population employed. This is easy to be explained, since the goods and service each person can consume is based on the number of labor, and their average output produced.

As a primary input in production, labor is the core of the productivity. Both microeconomics and macroeconomic measure the impact of labor over production with the marginal product of labor, and the revenue for selling that additional product. As a consequence, firms will maximize their output by employing workers at the level where the revenue of marginal product can exactly offset the nominal wage expense. So what elements will vary the labors’ production? Firstly, the human capital, including training, education, experience, characteristic and skills will determine how efficient is a worker. In addition, the capital goods, which is used to produce other goods and services will also affect production.

Speaking of capital, it is the second primary factor in production. The capital stock does not necessarily to be the equipment that produce products, it can be other long-lived asset that contributes to the manufacture process. For instance, the land and other natural resources, technology, and government policy are other forms of capital goods. Similar to the labor, the marginal product on capital tends to reduce beyond some point of input corresponding to the law of diminishing return. Thus the maximum production can be reached when the revenue marginal product of capital is equal to the real interest. The real interest is the opportunity cost for acquiring that specific new capital stock, because the next-best alternative is to save the amount of funds to purchase capital good in the bank and earn interest.

Since we know the two major factors that affect productivity,and therefore, economic growth. Policies that improve human capital and physical capital then will enhance the expansion in economic as well. Many people debated that these growths may be stopped in the future due to the limited natural resources. However, the development in social wealth, technology and productivity should cover this scarcity problem. By studying production function’s influence on economic growth, we will be able to predict at least in some level the future trend of a country’s economy, hence obtain in formations for analyzing other relative problems.