Answer to Question #40991 in Macroeconomics for farheen maroof
Of the factors affecting long-run living standards, the rate of productivity growth may well be the most important in that – according to the Solow Model – only ongoing productivity growth can lead to continuing improvement in output and consumption every year. Government policy can attempt to increase productivity in several ways.
Improving infrastructure: Some research findings suggest a significant link between productivity and the quality of a nation’s infrastructure – its highways, bridges, utilities, dams, airports and other publicly owned capital. The construction of the interstate highway system in the United States, for example, significantly reduced the cost of transporting goods and stimulated tourism and other industries. In the past 25 years the rate of US government investment in infrastructure has fallen, leading to a decline in the quality and quantity of public capital. Reversing this trend, some economists argue that might help achieve higher productivity.
Building Human Capital: Recent research findings point to a strong connection between productivity growth and human capital. The government affects human capital development through educational policies, worker training or relocation programs, health programs, and in other ways. Specific programs should be examined carefully to see whether benefits exceed costs, but a case may be made for greater commitment to human capital formation as a way to boost productivity growth.
One crucial form of human capital, which we haven’t yet mentioned, is entrepreneurial skill. People with the ability to build a successful new business or to bring a new product to market play a key role in the economic growth.
Encouraging Research and Development: The government also may be able to stimulate productivity growth by affecting rates of scientific and technical progress. The US government directly supports much basic scientific research. Most economists agree with this type of policy because the benefits of scientific progress, like those of human capital development, spread throughout the economy, Basic scientific research may thus be a good investment from society’s point of view, even if no individual firm finds such research profitable.
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