HOW PRODUCTIVITY IS DETERMINED
Although productivity is uniquely important in determining Robinson Crusoe’s standard of living, many factors determine Crusoe’s productivity. Crusoe will be better at catching instance has more fishing poles, if he has been trained in the best fishing techniques, if his island has a plentiful fish supply and if he invents a better fishing lure. Each of these determinants of Crusoe’s productivity-which we can call physical capital, human capital, natural resources, and technological knowledge-has a counterpart in more complex and realistic economies. Let’s consider each of these factors in turn.
Physical Capital per Worker
Workers are more productive if they have tools with which to work. The stock of equipment and structures that are used to produce goods and services is called physical capital, or just capital. For example, when woodworkers make furniture, they use saws, lathes, and drill presses. More tools allow the woodworkers to produce their output more quickly and more accurately A worker with only basic hand tools can make less furniture each week than a worker with sophisticated and specialized woodworking equipment As you may recall, the inputs used to produce goods and services-labor, capital, and so on-are called the factors of production. An important feature of capital is that it is a produced factor of production. That is capital is an input into the production process that in the past was an output from the production process The woodworker uses a lathe to make the leg of a table. Earlier, the lathe itself was the output of a firm that manufactures lathes. The lathe manufacturer in turn used other equipment to make its product. Thus, capital is a factor of production used to produce all kinds of goods and services, including more capital.
Human Capital per Worker
A second determinant of productivity is human capital. Human capital is the economist’s term for the knowledge and skills that workers acquire through education, training, and experience. Human capital includes the skills accumulated in early childhood programs, grade school, high school, college, and on-the-job training for adults in the labor force Although education, training, and experience are less tangible than lathes, bulldozers, and buildings human capital is like physical capital in many ways. Like physical capital, human capital raises a nation’s ability to produce goods and services. Also like physical capital, human capital is a produced factor of production. Producing human capital requires inputs in the form of teachers, libraries, and student time Indeed, students can be viewed as “workers” who have the important job of producing the human capital that will be used in future production.
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