Chapter 20: Problem 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 an increase in labor productivity results in higher GDP, given that labor force, hours worked, and population remain constant. Higher GDP then translates into higher GDP per capita, as the total output is distributed among the same number of residents, thereby making each person, on average, wealthier.

Step by step solution

Define labor productivity

Labor productivity is a measure of the output produced per unit of labor input (usually measured in hours worked). It allows us to assess the efficiency and effectiveness with which resources, specifically labor, are utilized in an economy.

Understand the relationship between labor productivity and GDP

GDP (Gross Domestic Product) measures the total value of all goods and services produced in an economy within a specific period of time. In simple terms, GDP can be explained as: \[ GDP = Labor \: Productivity \times Hours \: Worked \times Labor \: Participation \: Rate \times Population \] As seen in this equation, labor productivity directly contributes to the growth of GDP. In other words, an increase in labor productivity leads to an increase in GDP, holding everything else constant.

Explain GDP per capita

GDP per capita is a measure of the economic output per person in a given economy. It is calculated by taking the GDP and dividing it by the country's population. The formula for GDP per capita is: \[ GDP \: per \: capita = \frac {GDP} {Population} \]

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

Now, let's consider the effect of an increase in labor productivity on GDP per capita. If labor productivity increases, the GDP will also increase, assuming the labor force, hours worked, and population remain constant or don't change significantly. Therefore, an increase in labor productivity will have a positive impact on GDP per capita. In sum, the higher the labor productivity, the more goods and services are produced, which leads to an increase in GDP. This, in turn, leads to an increase in GDP per capita, as the total output is spread among the same number of residents in a country, making each person, on average, wealthier.

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