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wage. Thus, if labor receives a low wage, the workers are unable to provide or enjoy a high standard of living. Let's work this out through an example. Say that there is an international market for widgets. The going price is $5 per widget. Most productive countries are able to produce widgets and sell them for this price. One country, which is lagging in productivity, can only produce widgets at half the speed of the other countries. But, because the lagging country is only able to sell widgets at $5 each, it must reduce its costs of production. Since labor is the only cost that can be changed, as the machines are paid for and their maintenance cannot be put off, workers are paid less to make the country that lags in productivity competitive in the international marketplace.
3. Prosperity
What does a high standard of living entail? This judgment is relatively subjective, but there are a number of factors that seems to be common to most economists' ideals. These include physical possessions, nutrition, health care, and life expectancy. The more prosperous an economy, the better off the citizens of that economy are in terms of material possessions and health. Thus, prosperity is attainable when wages are high and countries are highly productive. This is not to say that prosperity is static. Instead, over time different countries becomes more and less prosperous. An economic boom in one country may bring temporary prosperity to that country. Similarly, a depression may wipe out some hard won gains in prosperity. Overall, prosperity is a relatively subjective judgment once the basic necessities of life are in place.
As mentioned earlier, the GDP per capita measure is the nominal GDP divided by the population. Thus, for a give amount of output, a country with a smaller population will have a higher standard of living than a country with a larger population. This is a problem often encountered in countries with very low GDP per capita measures of the standard of living. When GDP grows slowly and the population increases rapidly, the GDP per capita and thus the standard of living tends to decline over time. Thus, a major way of increasing the standard of living in a country is to control the population growth rate and thus increase the GDP per capita.
QUESTION/ANSWER SESSION:
Q.1 What are the effects of lagging productivity? Ans. In general, a country that lags in productivity will have both lower wages and lower living standards than a country with higher productivity. Q2. Why do lags in productivity create both lower wages and lower living standards? Ans. If we assume that all economies trade on the open market, than a country with lagging productivity must nonetheless price its goods at the same level as more productive countries if it hopes to sell on the international market. In this case, the only way for the lagging country to produce the good at a low price is to pay labor a low wage. If labor receives a low wage, workers are unable to provide or enjoy a high standard of living. Q3. What does a high standard of living entail? ANS. While this judgment is relatively subjective, there are a number of factors that seems to be common to most economists' ideals. These include physical possessions, nutrition, health care, and life expectancy. Q4. What is GDP per capita and what does it measure? ANS. The GDP per capita is calculated by dividing the nominal GDP in a common currency, say US dollars, by the total number of people in the
country. This gives the average income to which each member of the population potentially has access. In other words, the more money each individual is able to access, the higher the potential standard of living.