25 TITLE * MERGEFORMAT PRODUCTION AND GROWTH WHATS NEW IN THE SEVENTH EDITION:There is a new In the News box on “Does Food Aid Help or Hurt?”LEARNING OBJECTIVES:By the end of this chapter, students should understand:how much economic growth differs around the world.why productivity is the key determinant of a countrys standard of living.the factors that determine a countrys productivity.how a countrys policies influence its productivity growth.CONTEXT AND PURPOSE:Chapter 12 is the first chapter in a four-chapter sequence on the production of output in the long run. Chapter 12 addresses the determinants of the level and growth rate of output. We find that capital and labor are among the primary determinants of output. In Chapter 13, we address how saving and investment in capital goods affect the production of output, and in Chapter 14, we learn about some of the tools people and firms use when choosing capital projects in which to invest. In Chapter 15, we address the market for labor.The purpose of Chapter 12 is to examine the long-run determinants of both the level and the growth rate of real GDP per person. Along the way, we will discover the factors that determine the productivity of workers and address what governments might do to improve the productivity of their citizens.KEY POINTS:Economic prosperity, as measured by GDP per person, varies substantially around the world. The average income in the worlds richest countries is more than ten times that in the worlds poorest countries. Because growth rates of real GDP also vary substantially, the relative positions of countries can change dramatically over time.The standard of living in an economy depends on the economys ability to produce goods and services. Productivity, in turn, depends on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers.Government policies can try to influence the economys growth rate in many ways: by encouraging saving and investment, encouraging investment from abroad, fostering education, promoting good health, maintaining property rights and political stability, allowing free trade, and promoting the research and development of new technologies.The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital. As a result, while higher saving leads to higher growth for a period of time, growth eventually slows down as capital, productivity, and income rise. Also because of diminishing returns, the return to capital is especially high in poor countries. Other things equal, these countries can grow faster because of the catch-up effect.Population growth has a variety of effects on economic growth. On the one hand, more rapid population growth may lower productivity by stretching the supply of natural resources and by reducing the amount of capital available for each worker. On the other hand, a larger population may enhance the rate of technological progress because there are more scientists and engineers.CHAPTER OUTLINE:I.Economic Growth around the WorldTable 1A.Table 1 shows data on real GDP per person for 13 countries during different periods of time.1.The data reveal the fact that living standards vary a great deal between these countries.2.Growth rates are also reported in the table. Japan has had the largest growth rate over time, 2.65% per year (on average).Use Table 1 to make the point that a one-percentage point change in a countrys growth rate can make a significant difference over several generations. The powerful effects of compounding should be used to underscore the process of economic growth.3.Because of different growth rates, the ranking of countries by income per person changes over time.a.In the late 19th century, the United Kingdom was the richest country in the world.b.Today, income per person is lower in the United Kingdom than in the United States (a former colony of the United Kingdom).B.FYI: Are You Richer Than the Richest American?1.According to the magazine American Heritage, the richest American of all time is John B. Rockefeller, whose wealth today would be the equivalent of approximately $200 billion.2.Yet, because Rockefeller lived from 1839 to 1937, he did not get the chance to enjoy many of the conveniences we take for granted today such as television, air conditioning, and modern medicine.3.Thus, because of technological advances, the average American today may enjoy a “richer” life than the richest American who lived a century ago.C.FYI: A Picture Is Worth a Thousand Statistics1.This box presents three photos showing a typical family in three countries the United Kingdom, Mexico, and Mali. Each family was photographed outside their home, together with all of their material possessions.2.These photos demons