Question

Our economic well-being (RGDP per capita) increases when output per person rises (called productivity), average working hours increase, or the employment-population (EPR) increases. However, only one of these components significantly contributes to a rise in our standard of living and economic growth, productivity. (a) Explain why the other two components ( average working hours and EPR) are not a significant contributor to our economic well-being. (b) Provide the three types of investment that can cause long term growth and productivity. (c) Provide what does the government does to promote long term growth?

Answer 1

a) Real GDP per capita measures the value of final goods and services produced domestically within an accounted year divided by the total population corrected for inflation. This parameter is efficient than others mentioned in the question because a county can provide a better standard of living by providing higher wages if it is producing more (higher RGDP)

i) Average working hours: in developed countries, the USA has lower average working hours than developing countries like India. But with a lower average working hour doesn't guarantee that contribution to the output is low and vice-versa. The USA may have better techniques which take lesser time to generate output than a developing nation.

ii) EPR: This measure the country's working-age population that is employed. it also includes people who stopped looking for jobs because they come under the working-age population. thus the validity of the data is questionable. though employment also doesn't guarantee growth in that sector, say because if people are over-employed then the Marginal Productivity will decline.

b) Residential investment: This type of investment is very volatile, it constitutes of real-estate investment.

ii) Business fixed investment: This type of investment depends upon the rate of interest, firm's profit margin, government policies, etc. this type of investment is done to enhance the production process. it can be in the form of purchasing capital, investing in bonds, etc.

iii) Inventory investment: It is the component of GDP. It is that portion that the firm produces at period t and plans to sell it in period t+1. it is also called as an addition to the stock of the firm.

c) Briefly speaking, the government tries to keep the exchange rate very stable, which provides confidence to the investors. It ensures lesser crowding-out effect by keeping the interest rate good for investment purpose for boosting domestic investment. Gives subsidies to boost production in backward areas, develop and repairs existing infrastructure like roadways, etcetera. these all factors will ensure long term growth.