Compound InterestDifferences in int

Compound Interest
Differences in interest rates matter




Growth rates in GDP per capita have the same effect as interest rates
Relatively small growth in GDP per capita has a very large effect over a long period
In the long run, the growth rate of an economy matters
Years to Double
Useful formula to approximate the number of years it takes an initial amount to double
Given some annual interest rate
Years to double = 72 / interest rate
If the interest rate equals 2% then it takes 36 years for your money to double
If GDP grows at 3% then it takes 24 years for GDP to double
Growth rates matter
Real GDP per Capita
Notation
Y = real GDP
N = number of people employed
POP = population


GDP per capita is the product of output per worker and the share of the total population that is working
Consumption per person depends on
How much each worker produces and
The share of people working

Understanding Growth
GDP per capita increases when
Output per worker (Y / N) increases OR
The share of the population employed (N / POP) increases
Between 1960 and 2011,
GDP per capita increased 172%
Output per worker increased 127%
The share of the population employed increased from 36% to 45%
Larger working age population
Increase in female labor force participation

Y / POP and Y / N, 1960 - 2011
N / POP, 1960 - 2011
Understanding Growth
Determinants of Average Labor Productivity
U.S. average labor productivity is
24 times that of Indonesia
100 times that of Bangladesh
Six factors determine average labor productivity
Human capital
Physical capital
Land and other natural resources
Technology
Entrepreneurship and management
Political and legal environment
#1 Human Capital
Human capital comprises the talents, education, training, and skills of workers
Human capital increases workers' productivity
Germany and Japan used human capital to rebuild after World War II
Professional scientists and engineers
Apprentice and on-the-job training emphasized
Japanese increased emphasis on early education
Cost – Benefit Principle applies to building human capital
Premium paid to skilled workers
#2 Physical Capital
More and better capital increases worker productivity
Factory owner employs two people and adds capital
Each machine requires one dedicated operator






More capital increases output per hour
Diminishing returns to capital
Diminishing Returns to Capital
Diminishing returns to capital occurs if an addition of capital with other inputs held constant increases output by less than the previous increment of capital
Assumption: all inputs except capital are held constant
Result: output increases at a decreasing rate
When a firm has many machines, the most productive uses have already been filled
The increment in capital will necessarily be assigned to a less productive use than the previous increment
Principle of Increasing Opportunity Cost
Growth and Diminishing Returns to Capital
Implications of diminishing returns
Increasing capital will increase output and labor productivity
Positive contribution to growth
There are limits to increasing productivity by adding capital because of diminishing returns
Capital and Output per Worker, 1990
#3 Land and Other Natural Resources
Inputs other than capital increase worker productivity
Land for farming
Farmers are less than 3% of the population and they supply the US and export the surplus
Manufacturing requires raw materials and energy
Resources can be obtained through international markets
Japan, Hong Kong, Singapore and Switzerland have high levels of GDP per capita with a limited resource base
#4 Technology
New technologies are the single most important source of productivity improvement
Technical change can affect industries beyond the primary application
Transportation expanded markets for farm produce
Medicine
Communications
Electronics and computers

Productivity Puzzle
U.S. labor productivity grew 2.8% from 1947 – 1973
Slowed to 1.4% from 1973 – 1995
Resurgence to 3% since 1995
Slow-down remains a mystery
Growth since 1995 is largely attributed to information and communications technologies making workers more productive
Growth seen in industries that produce these technologies and industries that use them
Slower growth in sectors that do not use much information and communications technologies
#5 Entrepreneurship and Management
Entrepreneurs create new economic enterprises
Essential to a dynamic, healthy, growing economy
Examples
Henry Ford and mass production
Bill Gates and standardized graphical user interface operating system
Larry Page and Sergey Brin and Google's search
Policies should channel entrepreneurship in productive ways
Taxation policy and regulatory regime
Value innovation
Medieval China
Sung period (960 – 1270 AD) was technically sophisticated
Paper ■ Gunpowder
Water wheels ■ Compass?
Economic stagnation followed
Social system limited entrepreneurship
Emperor retained property rights to business
Seizure possible without notice
Scientific advances alone do not ensure technical change and growth
#6 Political and Legal Environment
Encourage people to be economically productive
Well-defined property rights are essential
Who owns what and how those things can be used
Reliable recourse through courts
Maintain political stability
Promote free and open exchange of ideas
Communism Failed
Output per person in the Soviet Union was probably less than one-seventh the US rate in 1991
The Soviet Union had ingredients for growth – human capital, physical capital, natural resources, technology
Two main flaws
Communal ownership of capital stock
General absence of private property rights
Incentive Principle could not work
Government planning replaced market system
Abundant unexploited opportunities
Political instability and appropriate legal framework


Promote Growth with Human Capital
Governments support education and training programs
U.S. public education support extends from kindergarten through institutions of higher learning
Head Start program for pre-school children
Job training and retraining programs
Government pays because education has externalities
A democracy works better with educated voters
Progressive taxes capture some of the higher income
Increases chances of technical innovation
Poor families could not pay
Promote Growth with Savings and Investment
Government policies can encourage new capital formation and saving in the private sector
Individual Retirement Accounts (IRAs) are an incentive for individuals to save
Government periodically offers investment tax credits
Government can invest directly in capital formation
Construction of infrastructure such as roads, bridges, airports, and dams
US interstate highway system reduced costs of transporting goods, making markets more efficient
Promote Growth with R & D Support
Research and development promotes innovation
Some types of research, such as basic science, create externalities that a private firm cannot capture
Silicon chip
Fund basic science with National Science Foundation (NSF) and other government grants
Government sponsors research for military and space applications
Government owns GPS satellites
Maintain political and legal framework to support growth

Promoting Economic Growth in Least Developed
Prescription for more human and physical capital is broadly correct
Appropriate technology and education
Most countries need institutions to support growth
Corruption creates uncertainty about property rights and drains financial resources out of the country
Regulation discourages entrepreneurship
Taxes discourage risk-taking
Markets do not function efficiently
Lack of political stability discourages foreign investment
The Costs of Economic Growth
Increasing the capital stock will increase GDP
Opportunity cost of producing more capital goods is
Fewer consumer goods
People may be willing to forego present consumption to have more in the future
Reduced leisure time
Possible risks of health and safety from rapid capital production
The cost of research and development (R&D) to improve technology
The cost of education to develop and use new capital
Limits to Growth
Can growth be sustained?
Depletion of some natural resources
Environmental damage and global warming
Computer models suggested growth is not sustainable
Did not adequately treat new and better products
Greater income can pay for better environmental quality
Ignored the market's response to increasing scarcity
High prices trigger a response
Strong response to energy crisis in mid 1970s
Government action needed in case of externalities


Mexico City Air Quality
Research indicates that pollution increases up to a point with increased GDP per person
After A, air pollution decreases and air quality improves
Estimates suggest Mexico is close to point A
Beyond a certain level of income, citizens value a cleaner environment and they are willingand able to pay for it

Hasil (Bahasa Indonesia) 1:

Bunga majemukPerbedaan dalam hal suku bungaTingkat pertumbuhan PDB per kapita memiliki efek yang sama sebagai suku bungaRelatif kecil pertumbuhan PDB per kapita memiliki efek yang sangat besar dalam jangka panjangDalam jangka panjang, tingkat pertumbuhan ekonomi yang pentingTahun Double Berguna formula untuk perkiraan jumlah tahun dibutuhkan jumlah awal untuk ganda Diberikan beberapa tingkat bunga tahunanTahun ke dua = 72 / suku bungaJika tingkat bunga yang sama dengan 2% maka dibutuhkan 36 tahun uang Anda dua kali lipatJika PDB tumbuh pada 3% maka dibutuhkan 24 tahun untuk PDB untuk gandaPertumbuhan harga masalahReal GDP per kapitaNotasiY = PDB nyataN = jumlah orang yang bekerjaPOP = populasiGDP per kapita adalah produk dari hasil per pekerja dan saham dari total populasi yang bekerjaKonsumsi per orang tergantung padaBerapa banyak setiap pekerja memproduksi danPorsi orang-orang yang bekerjaPemahaman pertumbuhanPDB per kapita meningkat ketikaOutput per pekerja (Y / N) meningkatkan atauSaham dari populasi yang dipekerjakan (N / POP) meningkatkanAntara tahun 1960 dan 2011PDB per kapita meningkat 172%Hasil per pekerja meningkat 127%Saham dari populasi dipekerjakan meningkat dari 36% menjadi 45%Populasi usia kerja yang lebih besarPeningkatan partisipasi angkatan kerja perempuanY / POP dan Y / N, 1960-2011N / POP, 1960-2011Pemahaman pertumbuhanFaktor-faktor penentu produktivitas tenaga kerja rata-rataProduktivitas tenaga kerja rata-rata US24 kali bahwa Indonesia100 times that of BangladeshSix factors determine average labor productivityHuman capitalPhysical capitalLand and other natural resourcesTechnologyEntrepreneurship and managementPolitical and legal environment#1 Human CapitalHuman capital comprises the talents, education, training, and skills of workersHuman capital increases workers' productivityGermany and Japan used human capital to rebuild after World War IIProfessional scientists and engineersApprentice and on-the-job training emphasizedJapanese increased emphasis on early educationCost – Benefit Principle applies to building human capitalPremium paid to skilled workers #2 Physical CapitalMore and better capital increases worker productivityFactory owner employs two people and adds capitalEach machine requires one dedicated operatorMore capital increases output per hourDiminishing returns to capitalDiminishing Returns to CapitalDiminishing returns to capital occurs if an addition of capital with other inputs held constant increases output by less than the previous increment of capitalAssumption: all inputs except capital are held constantResult: output increases at a decreasing rateWhen a firm has many machines, the most productive uses have already been filledThe increment in capital will necessarily be assigned to a less productive use than the previous incrementPrinciple of Increasing Opportunity CostGrowth and Diminishing Returns to CapitalImplications of diminishing returnsIncreasing capital will increase output and labor productivityPositive contribution to growthThere are limits to increasing productivity by adding capital because of diminishing returnsCapital and Output per Worker, 1990#3 Land and Other Natural ResourcesInputs other than capital increase worker productivityLand for farmingFarmers are less than 3% of the population and they supply the US and export the surplusManufacturing requires raw materials and energyResources can be obtained through international marketsJapan, Hong Kong, Singapore and Switzerland have high levels of GDP per capita with a limited resource base#4 TechnologyNew technologies are the single most important source of productivity improvementTechnical change can affect industries beyond the primary applicationTransportation expanded markets for farm produceMedicineCommunicationsElectronics and computersProductivity PuzzleU.S. labor productivity grew 2.8% from 1947 – 1973Slowed to 1.4% from 1973 – 1995Resurgence to 3% since 1995Slow-down remains a mysteryGrowth since 1995 is largely attributed to information and communications technologies making workers more productiveGrowth seen in industries that produce these technologies and industries that use themSlower growth in sectors that do not use much information and communications technologies#5 Entrepreneurship and Management Pengusaha membuat usaha ekonomi baruPenting untuk yang dinamis, sehat, pertumbuhan ekonomiContohHenry Ford dan produksi massalBill Gates dan standar grafis pengguna antarmuka sistem operasiLarry Page dan Sergey Brin dan Google pencarianKebijakan harus saluran kewirausahaan dalam cara yang produktifKebijakan perpajakan dan peraturanInovasi bernilaiAbad pertengahan CinaPeriode Sung (960-1270 m) adalah teknis canggihKertas ■ mesiuAir roda ■ Kompas?Stagnasi ekonomi yang diikutiSistem sosial terbatas kewirausahaanKaisar mempertahankan hak untuk bisnisPenyitaan mungkin tanpa pemberitahuanKemajuan ilmiah sendirian dan tidak menjamin teknis perubahan dan pertumbuhan#6 politik dan hukum lingkunganMendorong orang untuk menjadi ekonomi produktifHak milik Well-Defined sangat pentingYang memiliki apa dan bagaimana hal itu dapat digunakanDapat diandalkan jalan melalui pengadilanMenjaga stabilitas politikMempromosikan bebas dan terbuka pertukaran ideKomunisme gagalOutput per orang di Uni Soviet adalah mungkin kurang dari satu tujuh suku bunga AS di 1991Uni Soviet memiliki bahan-bahan untuk pertumbuhan-modal manusia, modal fisik, sumber daya alam, teknologiDua kelemahan utamaKepemilikan komunitas dari modal sahamUmum tidak adanya hak milik pribadiInsentif prinsip tidak bisa bekerjaPemerintah merencanakan menggantikan sistem pasarPeluang berlimpah asriKetidakstabilan politik dan kerangka hukum yang sesuaiMempromosikan pertumbuhan dengan modal manusiaPemerintah mendukung program pendidikan dan pelatihanDukungan pendidikan publik Amerika Serikat yang memanjang dari TK melalui institusi pendidikan tinggiKepala mulai program untuk anak-anak pra-sekolahJob training dan pelatihan ulang programPemerintah membayar karena pendidikan memiliki eksternalitasDemokrasi bekerja lebih baik dengan berpendidikan pemilihPajak progresif menangkap beberapa pendapatan yang lebih tinggiMeningkatkan kemungkinan inovasi teknisKeluarga miskin tidak dapat membayarMempromosikan pertumbuhan dengan investasi dan tabunganKebijakan pemerintah dapat mendorong pembentukan modal baru dan tabungan dalam sektor swastaRekening pensiun individu (IRAs) adalah insentif bagi individu untuk menyelamatkanPemerintah secara berkala menawarkan kredit pajak investasiPemerintah dapat berinvestasi secara langsung dalam pembentukan modalPembangunan infrastruktur seperti jalan, jembatan, Bandara, dan bendunganSistem jalan Raya interstate AS mengurangi biaya transportasi barang, pasar membuat lebih efisienMempromosikan pertumbuhan dengan R & D dukunganPenelitian dan pengembangan meningkatkan inovasiBeberapa jenis penelitian, seperti ilmu dasar, membuat eksternalitas bahwa perusahaan swasta tidak dapat menangkapChip silikonDana ilmu dasar dengan National Science Foundation (NSF) dan hibah pemerintah lainnyaPemerintah sponsor penelitian untuk militer dan aplikasi ruangPemerintah memiliki satelit GPSMempertahankan politik dan kerangka hukum untuk mendukung pertumbuhanMempromosikan pertumbuhan ekonomi di setidaknya dikembangkanPrescription for more human and physical capital is broadly correctAppropriate technology and educationMost countries need institutions to support growthCorruption creates uncertainty about property rights and drains financial resources out of the countryRegulation discourages entrepreneurshipTaxes discourage risk-takingMarkets do not function efficientlyLack of political stability discourages foreign investmentThe Costs of Economic GrowthIncreasing the capital stock will increase GDPOpportunity cost of producing more capital goods isFewer consumer goodsPeople may be willing to forego present consumption to have more in the futureReduced leisure timePossible risks of health and safety from rapid capital productionThe cost of research and development (R&D) to improve technologyThe cost of education to develop and use new capitalLimits to GrowthCan growth be sustained?Depletion of some natural resourcesEnvironmental damage and global warmingComputer models suggested growth is not sustainableDid not adequately treat new and better productsGreater income can pay for better environmental qualityIgnored the market's response to increasing scarcityHigh prices trigger a responseStrong response to energy crisis in mid 1970sGovernment action needed in case of externalitiesMexico City Air QualityResearch indicates that pollution increases up to a point with increased GDP per personAfter A, air pollution decreases and air quality improvesEstimates suggest Mexico is close to point ABeyond a certain level of income, citizens value a cleaner environment and they are willing and able to pay for it