Chapter 20: Problem 16

16\. How do gains in labor productivity lead to gains in GDP per capital?

Short Answer

Expert verified

Gains in labor productivity lead to gains in GDP per capita because increased labor productivity results in higher economic output per worker. This means that with higher labor productivity, the total GDP of a country can increase even if the number of workers remains constant. Consequently, when the population remains the same, the increased GDP is spread over the same number of people, resulting in a higher GDP per capita. Therefore, improvements in labor productivity contribute to an increase in GDP per capita, ultimately improving the standard of living for the population.

Step by step solution

Define labor productivity

Labor productivity refers to the output that is produced per unit of labor input, usually measured as output per hour worked or output per worker. It is an important indicator of the efficiency and effectiveness of an economy, as higher labor productivity often results in a higher standard of living for the population.

Define GDP per capita

GDP per capita is a measure of the average economic output produced per person in a given country. It is calculated by dividing the total Gross Domestic Product (GDP) of a country by its population. GDP per capita is often used as an indicator of the standard of living in a country, as it shows the average amount of wealth produced by each person.

Explain the relationship between labor productivity and GDP

GDP is the total value of goods and services produced in a country over a specific period of time. Increases in labor productivity mean that each worker can produce a higher amount of goods and services in the same amount of time. As a result, when labor productivity rises, the total GDP of a country can increase even if the number of workers remains constant.

Demonstrate the effect of increased labor productivity on GDP per capita

When labor productivity increases, it leads to a higher overall GDP, which means that there is more wealth being produced in the country. If the population remains constant, this increased GDP is spread over the same number of people, resulting in a higher GDP per capita. Consequently, an increase in labor productivity contributes to an increase in GDP per capita, raising the standard of living for the population.

Provide an example for clarification

Imagine a country where the labor productivity is 10 units of output per worker, and there are 10 workers. The total GDP would be 100 units (10 workers x 10 units/worker). If the population of this country is 20 people, the GDP per capita would be 5 units (100 units GDP / 20 people). Now, if the labor productivity increases to 12 units per worker, the total GDP would be 120 units (10 workers x 12 units/worker). With the same population of 20 people, the GDP per capita would now be 6 units (120 units GDP / 20 people). The increase in labor productivity has led to an increase in GDP per capita.