Question

For a high-income economy like Australia, what aggregate production function elements are most important in bringing about growth in GDP per capita? What about a middleincome country such as India? A low-income country such as Afghanistan?

Answer 1

Income per capita is one of the ways to figure out a country's wealth. The gross domestic product, or GDP, is the total value of all the goods and services a country produces. If you divide GDP by the number of residents, you get GDP per capita, or income per capita. It's one of the standard national income concepts used to compare the wealth of nations.

Ways in which GDP per capita can be increased by all the three countries stand same. It's just the difference of choice and availability of resources.

There are four broad ways in which a country’s GDP per capita can increase.

The first is to increase the number of labor hours worked, either because a larger share of the population is employed or because employed workers are working more hours per year. In turn, the employment ratio can increase either because more people join the labor force -- those who want to work -- or because the unemployment rate drops.

The three remaining sources of growth in per capita GDP represent different sources of growth in output per hour worked, namely:

Investment in physical capital increases the quality and quantity of equipment that each worker uses to produce output, and thereby increases workers’ productive capacity;

Investment in “human capital” -- skills and knowledge, through education and training -- improves the performance of the workforce by enabling them to do more complex and more productive tasks; and

Improvements in the productivity with which capital and labor are used, resulting in more valuable output from the same value of physical inputs. This source of output growth is known as “total factor productivity” or TFP