Productivity and Standard of Living

1. Productivity and Standard of Living Why are some nations wealthier than others?

2. A typical family with all their possessions in the U.K., an advanced economy Real GDP per capita: $36,600 Life expectancy: 80.7 years Adult literacy: 99%

3. A typical family with all their possessions in Mexico, a middle income country Real GDP per capita: $14,800 Life expectancy: 76 years Adult literacy: 86%

4. A typical family with all their possessions in Mali, a poor country Real GDP per capita: $1,100 Life expectancy: 53 years Adult literacy: 31%

5. The Key is Productivity • How productively does a nation use its resources? • Land, Labor, Capital, Human Capital • What factors improve productivity? • Investments in physical capital, human capital (education, health and training) and technology all improve productivity and ultimately raise a nation’s standard of living.

6. Measuring Productivity Physical Capital: Machines, equipment, factories. Anything physical that produces other goods. Human Capital: Knowledge, skills and training that make a worker more productive. Natural Resources: Anything that comes from the earth—renewable or nonrenewable—that can be used to produce. Technological knowledge: The understanding of how to increase productivity.

7. Production Function The relationship between quantity of inputs and quantity of outputs. Can be expressed this way: Y= A f(L, K, H, N) “A” is the variable that reflects the available production technology.

8. Economic Growth Savings and Investment lead to more capital. More capital leads to more production. Nations that invest heavily in productive components get richer. Nations that focus heavily on consumption don’t.

9. Economic Growth Diminishing returns: At some point the benefit from an extra unit of output begins to decline. This happens in wealthy countries. Catch-up Effect: Adding small amounts of capital to very poor nations produces large outsized gains in productivity.

10. Wealth by Gini Coefficient