Question

All over the world there are major differences in standards of living.

a) Why is real GDP per capita related to the standard of living? In your answer be sure to explain what real GDP per capita and standard of living mean.

b) Suggest things that determine labor productivity and how this relates to economic growth.

Answer 1

a)

real GDP per capita is the economic measure which is adjusted for inflation. The formula to calculate the measeure is as follows:

real GDP per capita = Total Output / Total Population

On the other hand,  standard of living is the availability of goods and necessity for the comfort of the person to live life happily.

real GDP per capita is better measure than Nominal GDP because it reflects the purchasing power of each individual. Two countries can have equal Nominal GDP but may differ in the no. of people living in two countries. Nominal GDP does not take into account the factor population. Actually, rise in the population should decrease the total economic output. Real GDP per capita reflects the difference and the country with lower population is always better-off against a country with higher population. So, lower population implies higher standard of living and higher real GDP per capita.

b)

Following are the factors that determine labor productivity:

- Morale of the worker

- Higher Competition implies higher productivity

- Skills of workers

- Management quality

- Incentives for worker like bonus, commission etc.

All these factors are related to economic growth. Higher morale, competition etc. boosts worker's confidence in the industry and improve the quality of the prodcue. Higher production and its quality improves the real GDP and promotes economic growth. Both Labor Productivity and growth are positively related to each other.

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