And obviously, maybe I'm exaggerating how quickly his productivity would grow. But maybe now the new production possibilities frontier looks something like this. He now has 2 rabbit traps. Or he has 2 more rabbit traps, he already had 1. So now he has 3 rabbit traps after two days. And so now if he wanted to devote themselves purely to rabbit trapping he can get 8 rabbits a day. Or he could do some combination in between. And actually this curve, it shouldn't go up at all.
I don't want to give you the impression that it went up and then down. It just goes kind of straight and does something like that right over here. So this right over here, I'll call that the production possibilities frontier 2. So what this hunter-gatherer is doing in this scenario right here is, he is making an investment.
He is accumulating capital. This right over here, this is capital. He is choosing, instead of to consume all of his resources-- so there's two things he can do. He can either spend all of his time in pure consumption, getting as many rabbits as possible a day and then eating them all, pure consumption.
Or he could reduce his consumption and then allocate some of his resources towards and investment. So this right over here, this is an investment.
It makes him more productive. This right over here is consumption. There's some base level of consumption he needs to survive.
But if he invests, then it increases his overall productive capacity. So if you viewed him as an economy by himself, by investing instead of consuming all of his resources, by investing some of his resources-- and in this case, his resources are his time and his expertise-- by investing some of them he's able to increase his productivity. And if you viewed him as an economy, he's experiencing economic growth. And so there's multiple types of investments.
And we'll talk about these in multiple videos. In this case, he is doing capital accumulation. Low interest rates encourage investment and discourage savings.
The government can also incentivize savings and investment in a number of ways. The most common way of doing so is by adjusting tax rates. Governments offer individuals and firms who take the action it desires. For example, a government can offer a tax break to companies that are investing in a desirable area e. It can also encourage savings through tax breaks. Roth IRAs are an instrument for saving for retirement that the US has made tax exempt under certain conditions.
In the first example, the government uses tax reductions to encourage investment for companies. In the second, the government encourages saving by helping savers earn more of the interest they earn over time in the savings vehicle. A country can impact its long-term growth by affecting human capital through education and healthcare investments.
Both education and healthcare are important because they have short- and long-term costs, and significantly affect the level of human capital in an economy. If a country can set up its education and healthcare systems to maximize the growth of human capital, it can also significantly impact its long-term economic growth prospects. Education economics studies economic issues related to education, such as the demand for education and the financial cost of education.
It studies the relationship between schooling and the labor market. By making educational policies and spending money now, a country ensures that it will have the necessary human capital to expand its economy. Human capital requires investment, but also provides economic returns. As education increases human capital increases, countries will also expect to see higher productivity, wages, and the GDP. As the number of years of education within a country increase, so does the per capita GDP.
Economics is one field of study that researches the effectiveness of education policies. Education policies are designed to cover all education fields from early childhood education through college graduate programs. Policies focus on school size, class size, school choice, tracking, teacher education and certification, teacher pay, teaching methods, curricular content, and graduation requirements.
To ensure economic growth, a country must have strong education policies. Health economics is the branch of economics that focuses on issues relating to the efficiency, effectiveness, value, and behavior in the production and consumption of health and healthcare. In this field, economists study the function of healthcare systems and public health-affecting behaviors.
Health economics focuses on the following topics:. Although health is not directly related to human capital, it is obvious that without health and life human capital will be impacted negatively.
Health policies are the decisions, plans, and actions that are undertaken in a country to achieve specific healthcare goals. According to the World Health Organization, a successful health policy defines a vision for the future, it outlines national priorities regarding health, and it builds a consensus and informs the public. Health policies can have positive long-run effects on not only human capital, but also economic growth as a whole. Health policies are designed to educate society and improve the current and long-term health of a country.
Examples of health policy topics include: vaccination policies, tobacco control, and pharmaceutical policies. Determining the structure of the healthcare system private, public, regulated, etc. Property rights are theoretical constructs that determine how a resource is used and owned. Resources can be owned and used by governments, collective bodies, or individuals.
There are four broad components of property rights. They are the right to:. Property usually refers to ownership and control over a good or resource. While high, these rates of return are not clear outliers. Figure E shows the distribution of their findings, focusing strictly on 33 studies they survey that generate estimates of the rate of return to public investment in the United States.
The average rate of return is If one excludes the top three and bottom three estimates, the average return drops slightly, to Figure E shows the central estimate and minimum and maximum estimated returns for the 33 studies surveyed by Bom and Ligthart It is worth noting that even the average minimum rate of return 6. Thus, it seems that CBO estimates of the benefits of public investment—particularly infrastructure investment—are too low given the other evidence in this literature. Finally, another striking feature of these estimates are how consistently they tend to rise over time, as more up-to-date data and research methods are used.
The studies are aligned on the horizontal axis chronologically, and the pattern of more recent studies yielding higher estimated rates of return is clearly visible in the chart. There is strong evidence that a period of increased infrastructure investment effort could provide large benefits to the American economy. It could provide a fiscal expansion in an economy where aggregate demand growth has been stubbornly slow for years, even in the face of prolonged expansionary monetary policy.
It could also aid the capital deepening that is necessary for boosting productivity growth, especially during a period that has seen anemic private-sector investment. This paper was made possible by a grant from the Peter G. Peterson Foundation. The statements made and views expressed are solely the responsibility of the author. Josh Bivens joined the Economic Policy Institute in and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization.
He has authored or co-authored three books including The State of Working America, 12th Edition while working at EPI, edited another, and has written numerous research papers, including for academic journals. He often appears in media outlets to offer economic commentary and has testified several times before the U. He earned his Ph. The large estimates of rates of return on public investment found by Aschauer were subsequently criticized on the grounds that they suffered from problems of simultaneity.
Essentially, the argument was that the statistical relationship between public investment and output found by Aschauer was spurious, driven only by the presence of nonstationarity in one or the other of the series. A data series is nonstationary if its mean or other statistical properties change over various parts of the sample in this case, if the mean or other statistical properties vary over time.
If a nonstationary series is used in regression analysis, it can yield regression results that are spurious. Heintz , however, notes that if both series public capital and output have a unit root in levels are nonstationary in the same way but are stationary in growth rates, then an error correction model can be used to undertake regression analysis and the simultaneity problem can be dealt with. He regresses the change in the ratio of output to private capital on lagged values of the dependent variable, the private capital stock, the labor force, and the infrastructure capital stock, as well as changes in private and infrastructure capital stocks and the labor force.
Table A1 confirms that each of the data series has a unit root in levels but is stationary in first differences. For each series, the hypothesis of a unit root cannot be rejected in levels, but it can be rejected at the 5 or 1 percent level of significance for the first differences. Given this confirmation, we can employ the Heintz error correction model. Notes: T -statistics are reported, with p -values in parentheses. Three asterisks denote significance at the 1 percent level, and two asterisks denote significance at the 5 percent level.
Data on private and infrastructure capital stocks was obtained from the Bureau of Economic Analysis BEA series on fixed assets. Our infrastructure measure is the broad measure used in Figure A. Private-sector output is total GDP with federal, state, and local government consumption and investment subtracted out.
All numbers in this paragraph are taken from CBO It should be noted that these are multipliers that hold when monetary policymakers accommodate the fiscal expansion. If monetary policymakers instead engage in contractionary measures to offset any fiscal expansion, the best estimate of these or any other multiplier is zero.
Because this is commonly misunderstood, it is important to realize that a multiplier of 1 does not mean that stimulus has somehow failed. It means it has boosted overall output by exactly the amount of the fiscal impulse.
Stimulus fails to work in some economic models when the extra output generated by the fiscal impulse leads to an equal and opposite contraction in private-sector output, resulting in a multiplier of zero. Aaron, Henry J. Alicia H. Munnell, ed. Conference Series no. Aschauer, David A. Bivens, Josh. Economic Policy Institute. Blanchard, Olivier J. Bom, Pedro, and Jenny Ligthart. Various years. Fixed Asset Tables [online data tables]. Department of Commerce. Issues and Options in Infrastructure Investment.
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