Main Ideas
1. Definition of Wealth: Economic output is measured by GDP, or Gross Domestic Product, indicating a country's overall economic health.
2. GDP vs. GDP Per Capita: GDP alone doesn't reflect individual wealth; GDP per capita divides GDP by the population to provide a clearer measure of wealth per person.
3. Human Development Index (HDI): This index considers life expectancy, literacy, and quality of life, showing that higher GDP per capita often correlates with better living conditions.
4. Role of Natural Resources: Countries rich in natural resources (like Zimbabwe) can still be poor due to ineffective governance and management.
5. Importance of Productivity: Productivity—output per worker—is a key factor affecting wealth. More productive countries allow workers to earn more.
6. Historical Context: The productivity of U.S. workers today is significantly higher than a century ago, leading to increased average wages.
7. Factors of Production: Land, labor, and capital (including human capital) are necessary for production, but how they are organized (technology) is even more crucial.
8. Impact of Technology: Advancements in technology, like the internet, have transformed productivity by enhancing communication and efficiency among workers.
9. Economic Growth of Developing Countries: Many developing nations, such as China and Ghana, have improved their standards of living by enhancing their capital and technology.
10. Productivity as the Key to Success: The central reason some countries thrive economically while others falter is their level of productivity.
Quotes
1. "If we're going to figure out why some countries are rich and others are poor, we first have to define what it means to be rich."
2. "GDP is the market value of all goods and services newly produced in a country in one year."
3. "A country with a high GDP per capita is considered rich."
4. "Money may not buy happiness, but it can prevent a lot of misery."
5. "The more that each worker can produce, the more money they can earn."
6. "US workers earn eighteen times more per hour than Bangladeshi workers because they're able to produce eighteen times more output per hour."
7. "Higher productivity not only helps explain why we have more money to buy things, but also why we have more things to buy."
8. "Finding new ways to organize production is virtually free."
9. "Connectivity equals productivity."
10. "Increasing productivity has resulted in increased standards of living for much of humanity over the last hundred years."
Transcript
Adriene: Hi, I'm Adriene Hill.
Mr. Clifford: And I'm Jacob Clifford. Welcome to Crash Course Economics.
Adriene: So far, we've talked about GDP and the overall economy, but we haven't really discussed why some countries have a high GDP and others have a low GDP. So, why are some countries rich and others poor? Let's investigate.
Mr. Clifford: Look, a clue! Productivity!
Adriene: Hmm...
Mr. Clifford: If we're going to figure out why some countries are rich and others are poor, we first have to define what it means to be rich. Economists measure economic output by looking at Gross Domestic Product, or GDP. As you remember from the last video, GDP is the market value of all goods and services newly produced in a country in one year. India's GDP is over six times larger than the GDP of Singapore, but that doesn't mean the average Indian is richer than the average Singaporean. That's because India has 240 times more people than Singapore.
So, economists look at something called GDP per capita to determine how wealthy a country is. GDP per capita is the GDP of the country divided by its population. It represents output per person, and a country with a high GDP per capita is considered rich.
Of course, some of you may say being rich has nothing to do with GDP or money; it has to do with whether or not you're happy. Fine, money may not buy happiness, but it can prevent a lot of misery. The United Nations' Human Development Index, or HDI, measures life expectancy, literacy, education, and quality of life, ranking countries according to their findings. The data shows that countries with a high GDP per capita have far less infant mortality, poverty, and preventable diseases.
So, economists often use GDP per capita to measure a country's standard of living. Countries with the lowest standard of living are conventionally considered poor.
Adriene: If you ask someone on the street, they might say the difference is due to a lack of natural resources or inept governments, if the person doesn't subscribe to some antiquated racial or social Darwinist stereotypes—but we should talk about those ideas. Let's skip the racial and social Darwinist stereotypes, but resources and leadership are interesting.
First, resources: Look at Singapore, which is third in GDP per capita and ninth on the Human Development Index, or Switzerland, which is ninth in GDP per capita and third on the HDI. Singapore is a tiny island, and Switzerland's main natural resource is cows. And cows are great! I love cows, but they aren't really natural resources.
Zimbabwe, on the other hand, has tons of natural resources like fertile soil, coal, and rare minerals, but their economy? It's a wreck. It's one hundred sixty-first (161st) in GDP per capita and one hundred fifty-sixth (156th) on the HDI. Their incompetent and corrupt government keeps them poor.
For comparison, the GDP per capita in the US is eighteen times higher than in Bangladesh. We're not just trouncing Bangladesh GDP per capita-wise; we're also crushing the GDP numbers of our great-grandparents. Take that, Aloysius! GDP per capita in the US today is about eight times higher than it was one hundred years ago. That's pretty impressive. Maybe the Thought Bubble can produce an explanation.
Mr. Clifford: Let's say John runs a bakery. Each worker produces a dozen donuts per hour, and each donut sells for $1. If John wants to stay in business, he can't pay his workers more than $12 an hour. Obviously, he needs to pay for the ingredients and the oven, but even if he wanted to be generous, he couldn't pay them $20 an hour; they just don't produce enough to cover the cost. However, if John can find a way for each worker to produce four dozen donuts per hour, he can pay them $20 per hour. Simply put, the more that each worker can produce, the more money they can earn.
Economists argue that the main reason some countries are rich is because of their productivity—their ability to produce more output per worker per hour. US workers earn eighteen times more per hour than Bangladeshi workers because they're able to produce eighteen times more output per hour. US workers today earn eight times more per hour than US workers a hundred years ago because they produce eight times more output per hour. Not only is the US producing more, but it's also producing higher-value products, like Avengers movies and jet engines.
So, going back to our bakery example, it's like a worker from a hundred years ago being able to produce six plain donuts per hour, while today's workers can produce sixty salted caramel designer cupcakes per hour.
Adriene: Thanks, Thought Bubble. Before we go further, we need to point out the limitations of this bakery example. It's true that productivity is key. A country that is more productive can create more and generate higher incomes, but in real life, it doesn't always look like that. For example, in the US, GDP per capita has been steadily increasing for decades, but median family incomes haven't changed much at all. This raises issues of income inequality, and we're going to devote an entire episode to it.
Limitations aside, low productivity remains a fundamental reason why some countries are poor. Higher productivity not only helps explain why we have more money to buy things, but also why we have more things to buy.
Speaking of things to buy, because it is socially unacceptable for me to appear in the same clothes repeatedly, I need forty blouses to make this series. That is a lot of blouses. That strains resources, pollutes the planet, and at high levels like forty, is completely unsustainable. Don't worry, though; some of these are from thrift stores.
So what about people in poor countries? What do they need? They need food, clothing, and housing. They need clean water, plumbing, and sewage systems. They need hospitals and medicine, but all those things have to be produced. A country that produces more of these things with fewer resources will be wealthier and healthier, and perhaps even happier than a country that can't. But making a million cell phones isn't very impressive if your country has one hundred million people, so we need to look at how much stuff we produce per person— that's GDP per capita.
Mr. Clifford: So if it all boils down to productivity, what makes some countries more productive than others? Let's look at the main ingredients needed to produce things, which economists call the factors of production. First, you need land, which includes all natural resources. Then you need labor, which includes workers, and you also need capital, which encompasses machines, factories, and infrastructure—things you need to produce other things. One special type of capital is the education, knowledge, and skills of workers, which economists refer to as human capital. So, school isn't just about torturing you—except for Physical Education—it's about helping your human capital.
The quantity and quality of these resources is the first step to being more productive, but perhaps even more important is how you use them. Increasing the amount of capital has a cost, but finding new ways to organize production is virtually free. Economists call this organizational effectiveness "technology," which can be thought of as the good ideas about how to combine labor and capital that you already have.
US workers produce so much more than Bangladeshi workers because the US has more factories, robots, and computers. However, more capital only gets you so far; it increases your production capacity but also consumes some of that capacity. You have to develop more factories and workers and machines to make more capital, and then replace them when they wear out. Technology, on the other hand, takes the same amount of resources and organizes them in a way to produce more output.
Adriene: Here's an example. Twenty-five years ago, you could find computers in nearly every workplace in the US, but productivity growth was flat. Then, starting in about 1995, US productivity boomed, led by computer technology. So, what changed? In the late 80s and early 90s, most workplace computers were individual units, plugged into nothing but an electric outlet. They were useful for writing and printing documents, serving as oversized calculators or playing games like Oregon Trail. But that was about it. When the World Wide Web came along, everything changed. Computers became far more useful when they could communicate with each other. The computer at the store could talk to the computer at the warehouse, which could talk to the computer at the factory. That means I can get a new blouse from the other side of the world almost immediately. Connectivity equals productivity.
Productivity in the US boomed for the next ten years, and wages jumped as a result. Two hundred years ago, productivity in the US wasn't that great, but it grew a little bit every year. Compounding that growth over decades and centuries created the huge gap between the US standard of living and that of many developing countries. The good news is that in recent decades, many developing countries, like China, South Korea, Mexico, and Ghana, have dramatically improved their capital and technology, leading to an increase in their living standards.
So if you want a single, one-word answer as to why some countries are more successful than others, here it is: productivity.
Mr. Clifford: And by "big picture," we mean both globally and historically.
Adriene: Increasing productivity has resulted in increased standards of living for much of humanity over the last hundred years, and it’s hard to argue that this is a bad thing.
Mr. Clifford: Thanks for watching; we'll see you next week.