Chapter 7: Problem 16

How do gains in labor productivity lead to gains in GDP per capita?

Short Answer

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An increase in labor productivity leads to a higher output (GDP) with the same labor input. This means that the workforce is producing more goods and services per hour worked, causing GDP to increase. If population growth is slower than or equal to the rate of GDP growth, GDP per capita will also increase, which indicates an improvement in the average standard of living. Therefore, gains in labor productivity will lead to gains in GDP per capita, assuming the gains from increased productivity aren't offset by rapid population growth.

Step by step solution

Define Labor Productivity

Labor productivity is a measure of the amount of goods and services produced by one hour of labor. It is typically calculated as the ratio of output to labor input (hours worked). In other words, labor productivity shows how efficiently labor is utilized to produce goods and services in the economy.

Define GDP per capita

Gross Domestic Product (GDP) is the total value of all goods and services produced in a country over a specific period (usually one year). GDP per capita is calculated by dividing the total GDP by the population of the country. This measure indicates the average standard of living in a country as it shows the economic output produced per person.

Explain the relationship between labor productivity and GDP

An increase in labor productivity means that the workforce in a country is producing more goods and services per hour worked. This means that with the same amount of labor input (hours worked), the total output (GDP) will increase. Keeping other factors constant, an increase in labor productivity typically leads to an increase in GDP.

Discuss the impact of population growth on GDP per capita

Population growth affects the calculation of GDP per capita. If the population increases faster than GDP, then GDP per capita may decrease even if GDP is increasing. In other words, an increasing population can dilute the gains of increased GDP per capita. To maintain or improve the standard of living, GDP has to grow at least as fast as the population.

Relate the increase in labor productivity to gains in GDP per capita

An increase in labor productivity leads to a higher output (GDP) with the same labor input. If the population growth is slower than or equal to the rate of GDP growth, then GDP per capita will increase, meaning the average standard of living will improve. In this way, gains in labor productivity will lead to gains in GDP per capita, assuming that the gains from increased productivity aren't offset by rapid population growth.