Question

Question 15 Labor productivity 400 Real GDP per capita 300 Private employment Median family income 200 1947-100 950 55 '60 65 775 80 85 90952000 050 SOURCE FEDERAL RESERVE BANK OF ST. LOUIS; ERIK BRYNJOLFSSON AND ANDREW MCAFEE FROM "THE GREAT DECOUPLING,"JUNE 2015 eHBR ORG a) The graph above shows various indexes from the US from 1950 where 1947 is treated as 100. Briefly describe the variables in the graph b) What are the implications for workers of the trends that the graph shows? c) Evaluate the advantages and disadvantages of GDP per capita and median family

Answer 1

a) The variables described in this graph are labor productivity, employment, median family income and real GDP growth. The labor productivity is the output generated by a worker per hour. In this graph, labor productivity rises to 400 from 100 during the period 1947-2010 which indicates a 300% increase in labor productivity rate. The private employment is number of people employed by private sector and in this graph the private employment index shows an increase of 200% during the period 1947-2010.

Median family income is the average family income of families into two broad groups, one group having income above the specific amount and another having income less than that amount. In this graph, the median family income is 200 in the year 2010 which indicates an increase of 100% during the period 1947-2010. The real per capita GDP is the real GDP divided by total population of a country. Real GDP is obtained from dividing nominal GDP by GDP Deflator and multiplying it by 100.

Mathematically real GDP = Nominal GDP/GDP Deflator *100

In this graph, real GDP per capita is 300 which indicates an increase of 200% during the period 1947-2010.

b) The above graph depicts that though labor productivity shows an overall increase of 300% during the period 1947-2010, the per capita GDP growth was slightly lower followed by median family income, This means that the median family income did not rise significantly as the labor productivity and per capital real GDP in 1947-2010 as cost of living index during the same period also significantly rose affecting real income of US population.

c) GDP per capita is measurement of economic prosperity of people in a country. It includes aggregate consumption (public and private), aggregate savings (public and private), price level and industrial output and helps government in formulating appropriate monetary and fiscal policies to raise the employment and industrial output and reduce the unemployment and inflation rate. However, GDP per capita does not include the charity works, income earned from illegal method such as theft, bribery and robbery. GDP per capita also does not include the environmental benefits to the society that certainly affects the health and well being of people.

Median family income is computed by considering the middle most income of families in a population and dividing population into two family groups one having income higher than middle income value and another having income less than middle income. The median family income is suitable for depicting the economic well being of a small population but for large population such as population of US, median family income is not considered a good evaluation tool of standard of living and well being of people. The income distribution in a large population is too wide and finding a middle most income value for computation of median family income is a challenging tasks for evaluator. Therefore, the mean family income is considered a good indicator of standard of living of a large population