Productivity Growth and Investment Process - Assignment Example

A higher rate of saving leads to a higher growth rate temporarily since, as the capital rises, leading to more productivity, it will reach some point whereby the capital will fall. This can be illustrated by the fact that there will be a small change in production because the workers already have enough capital for production. This is evidenced by the fact that capital is put through diminishing returns, a situation where output decreases as the amount of capital is increased (Mankiw, 2012). The higher rate of saving does not increase the growth rate indefinitely since more capital is not put to use in helping the country. Instead, as income rises, the growth finally slows down. All this is due to the effect of diminishing returns to scale, which affects the growth rate in the short term and stabilizes it as income increases.

Question 4
Investment is a process through which the government can increase its factors of production for future use, which can be done by improving current resources to produce more capital (Mankiw, 2012). Conversely, national saving is the amount of resources that remains after the deduction of consumption and government purchases in an economy. The relationship between investment and national savings can be illustrated by the equation:

Y=C+I+G+NX; where I represents investment, C is consumption, Y is GDP, G denotes government purchases NX is the net export, given by exports less imports.
Provided that no other factors act on the economy are altered, for example, the represented government does not borrow any money outside or doe not engage itself in international trade, the above equation will have some changes and the outcome is;
Y=C+I+G, which happens because the net exports remain constant.
The above equation shows that GDP is derived from the sums of consumption, investment, and government purchases, and investment can be obtained from the equation by subtracting C, (consumptions) and I, (investments) on both sides,

Y- C-G = I
The above results show that investments are equivalent to national savings provided that the left side of an equation represents total income resulting from the payment of income and government purchases. Hence it shows that there is a relationship between national savings and investments.
Productivity Growth

Question 1
The FRBSF economic letter (2009) indicates that before 1995, the main contributor to productivity growth was human capital and physical capital, but after 1995 this changed to Information Technology (IT) since productivity started rising in the mid-1990s in the firms that were using IT. The changes come about due to the rapid transformation of information technology and its use in many sectors for the transfer of information, computers, and semiconductors. The use of information technology increased the labor productivity rate which led to higher productivity growth, which is the reason behind the difference between the year 1995 and earlier years when the productivity growth rate was low.

Question 2

Based on the author’s observation, the US economy may, in the future, still be the largest and most productive (FRBSF, 2009). This observation is because the productivity growth rate between 1995 and 2000 was due to the implementation of Information Technology which had a bigger share of investment and the US government had invested fully in it. Based on the different authors in the symposium, the productivity rate of 2% per annum will be sustained and no major increase will be seen, but the economy will remain stable. From an analysis of the article, there is no indication that the economy will drop or be overtaken by any other world economy, a fact that is optimistic about the future of the U.S. economy. In addition to that, the author predicts that the growth rate in the future in some sectors to be less than the growth rate seen in previous years. However, this growth rate does not affect the other sectors. Despite the disagreement between all the authors, it is still evident that the economy will grow due to increasing or steadying productivity rates. Read More