How the Economy as a Whole Works
We started by discussing how individuals make decisions and then looked at how
people interact with one another. All these decisions and interactions together
make up “the economy.” The last three principles concern the workings of the
economy as a whole.
1-3a Principle 8: A Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services
The differences in living standards around the world are staggering. In 2014, the
average American had an income of about $55,000. In the same year, the average
Mexican earned about $17,000, the average Chinese about $13,000, and the aver-
age Nigerian only $6,000. Not surprisingly, this large variation in average income
is reflected in various measures of quality of life. Citizens of high-income coun-
tries have more TV sets, more cars, better nutrition, better healthcare, and a longer
life expectancy than citizens of low-income countries.
Changes in living standards over time are also large. In the United States,
incomes have historically grown about 2 percent per year (after adjusting for
changes in the cost of living). At this rate, average income doubles every 35 years.
Over the past century, average U.S. income has risen about eightfold.
What explains these large differences in living standards among countries and
over time? The answer is surprisingly simple. Almost all variation in living stan-
, dards is attributable to differences in countries’ productivity—that is, the amount
of goods and services produced by each unit of labor input. In nations where
workers can produce a large quantity of goods and services per hour, most peo-
ple enjoy a high standard of living; in nations where workers are less produc-
tive, most people endure a more meager existence. Similarly, the growth rate of a
nation’s productivity determines the growth rate of its average income.
The fundamental relationship between productivity and living standards is sim-
ple, but its implications are far-reaching. If productivity is the primary determinant
of
living standards, other explanations must be of secondary importance. For
example, it
might be tempting to credit labor unions or minimum-wage laws for the rise in
living
standards of American workers over the past century. Yet the real hero of
American
workers is their rising productivity. As another example, some commentators have
claimed that increased competition from Japan and other countries explained the
slow growth in U.S. incomes during the 1970s and 1980s. Yet the real villain was
not
competition from abroad but flagging productivity growth in the United States.
The relationship between productivity and living standards also has profound
We started by discussing how individuals make decisions and then looked at how
people interact with one another. All these decisions and interactions together
make up “the economy.” The last three principles concern the workings of the
economy as a whole.
1-3a Principle 8: A Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services
The differences in living standards around the world are staggering. In 2014, the
average American had an income of about $55,000. In the same year, the average
Mexican earned about $17,000, the average Chinese about $13,000, and the aver-
age Nigerian only $6,000. Not surprisingly, this large variation in average income
is reflected in various measures of quality of life. Citizens of high-income coun-
tries have more TV sets, more cars, better nutrition, better healthcare, and a longer
life expectancy than citizens of low-income countries.
Changes in living standards over time are also large. In the United States,
incomes have historically grown about 2 percent per year (after adjusting for
changes in the cost of living). At this rate, average income doubles every 35 years.
Over the past century, average U.S. income has risen about eightfold.
What explains these large differences in living standards among countries and
over time? The answer is surprisingly simple. Almost all variation in living stan-
, dards is attributable to differences in countries’ productivity—that is, the amount
of goods and services produced by each unit of labor input. In nations where
workers can produce a large quantity of goods and services per hour, most peo-
ple enjoy a high standard of living; in nations where workers are less produc-
tive, most people endure a more meager existence. Similarly, the growth rate of a
nation’s productivity determines the growth rate of its average income.
The fundamental relationship between productivity and living standards is sim-
ple, but its implications are far-reaching. If productivity is the primary determinant
of
living standards, other explanations must be of secondary importance. For
example, it
might be tempting to credit labor unions or minimum-wage laws for the rise in
living
standards of American workers over the past century. Yet the real hero of
American
workers is their rising productivity. As another example, some commentators have
claimed that increased competition from Japan and other countries explained the
slow growth in U.S. incomes during the 1970s and 1980s. Yet the real villain was
not
competition from abroad but flagging productivity growth in the United States.
The relationship between productivity and living standards also has profound
