Question

Earlier this semester we learned how GDP per capita (Gross Domestic Product per person) is the most significant standard of living measure for an economy.  If you were an advisor to a national government, you'd make recommendations on how to improve the quality of life. I'd like you to consider two different countries:   Malawi, an undeveloped African nation and  Germany, a developed European nation.    
  We know how to measure GDP per capita. It is calculated by dividing GDP by the number of people in a country. I've rewritten and expanded this measurement below to identify three components which determine GDP per capita and the standard of living for an economy.

GDP      Gross Domestic Production     # workers             # people in labor force
---- = ---------------------------             X   -------------------            X -----------------------
population # workers                           # people in labor force             # people in the country

This simplified model of GDP per capita suggests three key factors:

1. Productivity of Workers (GDP divided by the number of workers)
2. Employment Rate (number of workers divided by number of people in labor force)
3. Labor Force Participation (number of people in labor force divided by number of people in the country)

Together, these factors determine GDP per capita and the standard of living. Your assignment is to consider these factors as you develop a plan to improve the standard of living for Malawi and Germany.

Part One of the assignment is to decide which factor is most important in increasing the standard of living for Malawi and what policy (or policies) you would implement to leverage this factor.

Part Two of the assignment is to decide which factor is most important in increasing the standard of living for Germany and what policy (or policies) you would implement to leverage this factor..

There's no single right answer for Malawi or Germany. However you do need to insure you properly associate your policies/programs to determine whether they will increase productivity, employment or labor force participation.

Answer 1

Part One

The main reason for poverty in a country is the lower availability of jobs for people who are willing to work. A person without a regular flow of income will not be able to improve his standard of living. The most important aspect of Malawi would be the employment rate. A lower employment rate signifies that people are looking for work but cannot find suitable jobs. The number of available jobs is far less than the number of people ready to work. This stops the country from growing and improving its standard of living. If the employment rate increase, more workers will enter the labor force and earn income. Aggregate expenditure will increase which in turn will stimulate economic activity and GDP will grow leading to higher standards of living. To leverage this factor, it is important to address the supply side, that is, more jobs need to be created. I would recommend the following policies -

1) More government investment to create jobs in different sectors.

2) Less stringent rules for borrowing for investment purposes.

Part two

For developed countries, unemployment is generally under control as a major portion of the workforce is able to secure jobs for themselves. To increase GDP, the most important aspect of this economy is labour productivity. Increase in labour productivity will lead to higher GDP using the same resources. As a major proportion of the workforce is already employed, increasing the employment rate will not contribute majorly to GDP. However, an increase in productivity can increase GDP rapidly. For example, improved technology can rapidly increase labour productivity. To leverage this aspect, I would suggest -

1) Increased investment in R &D

2) Investment in more physical capital for labours to work with