Production And Growth
When you travel around the old you see tremendous variation in the standard of living. The average income in a rich country, such as the United States, Japan, or Gerinany, is more than ten times the average income in a poor country, such as India, Indonesia, or Nigeria. These large differences in income are reflected in large differences in the quality of life. People in richer countries have more automobiles, more telephones, more televisions, better nutrition, safer housing, better healthcare, and longer life expectancy.
Even within a country, there are large changes in the standard of living over time. In the United States over the past century, average income as measured ‘by real GDP per person has grown by about 2 percent per year. Although 2 percent might seem small, this’ rate of growth implies that average income’ doubles every 35 years. Because of this growth, average income today is about eight times as high as average income a century ago. As a result, the typical American enjoys much greater economic prosperity than did his or her parents, grandparents, and great-grandparents Growth rates vary substantially from country to country. In some East countries, such as Singapore, South Korea, and Taiwan, average income has risen about 7 percent per year in recent decades At this rate, average income doubles every 10 years. These countries have, in the length of one generation gone from being among the poorest in the world to being among the richest. By contrast, in some African countries, such as Chad, Ethiopia, and Nigeria, average income has been stagnant for many years. What explains these diverse experiences? How can the rich countries be sure to maintain their high standard of living? What policies should the poor countries pursue to promote more rapid growth and join the developed world? These are among the most important questions in macroeconomics As economist
Robert Lucas put it, “The consequences for human welfare in questions like these are simply Once one starts to think about them, it is hard to think about anything else.”
In the previous two chapters, we discussed how economists measure macroeconomic quantities and prices. In this chapter, we start studying the forces that determine these variables. As we have seen, and economy’s gross domestic product (GDP) measures both the total income earned in the economy and the total expenditure on the economy’s output of goods and services. The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a good gauge of economic progress. Here we focus on the long-run determinants of the level and growth of real GDP. Later in this book, we study the short run fluctuations of real GDP around its long-run trend.
We proceed here in three steps. First, we examine international data on real GDP per person. These data will give you some sense of how much the level and growth of living standards vary around the world Second, we examine the role of productivity-the amount of goods and services produced for each hour of a worker’s time. In particular, we see that a nation’s standard of living is determined by the productivity of its workers, and we consider the factors that determine a nation’s productivity Third we consider the link
between productivity and the economic policies that a nation pursues.
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