Productivity and Growth: Crash Course Economics #6

Summary

Crash Course Economics explores the disparity in wealth between countries, focusing on GDP per capita as a measure of a nation's wealth. It debunks myths about natural resources and government competence, emphasizing productivity as the key determinant of economic success. The video illustrates how technological advancements and efficient use of resources lead to higher output and better living standards, highlighting the US's historical productivity growth and the recent improvements in developing countries.

Takeaways

• 📈 GDP per capita is a key indicator of a country's wealth, representing the market value of goods and services produced per person in a year.
• 🌍 Countries with higher GDP per capita generally have a better standard of living, with lower infant mortality rates, less poverty, and fewer preventable diseases.
• 💡 Productivity is the main reason why some countries are rich and others are poor; it's the ability to produce more output per worker per hour.
• 🔧 Factors of production, including land, labor, capital, and human capital, are essential for a country's productivity.
• 🤖 The use of technology, such as computers and the internet, can significantly increase productivity by improving the organization of production.
• 🏭 Capital, including machines, factories, and infrastructure, is important, but it's the efficiency of its use that truly drives productivity.
• 🌐 Connectivity, as exemplified by the impact of the World Wide Web, can enhance productivity by allowing different parts of an operation to communicate and work together more effectively.
• 📚 Education plays a crucial role in building human capital, which is vital for a country's productivity and economic growth.
• 🚫 The script dismisses outdated racial and social Darwinist stereotypes as explanations for economic disparities between countries.
• 💼 Leadership and governance also play a role in a country's economic success, as poor governance can hinder productivity and economic growth.
• 🌱 While natural resources can contribute to wealth, their abundance does not guarantee economic success, as seen in the contrasting examples of Singapore and Zimbabwe.

Q & A

What is the primary focus of the Crash Course Economics video?

The video focuses on understanding why some countries are rich and others are poor, exploring the concept of GDP and GDP per capita as indicators of a country's wealth.

How is a country's economic output measured?

A country's economic output is measured by its Gross Domestic Product (GDP), which is the market value of all goods and services newly produced in a country in one year.

What is GDP per capita and why is it important?

GDP per capita is the GDP of a country divided by its population. It represents the output per person and is used to determine a country's wealth, as a higher GDP per capita indicates a richer country.

What is the Human Development Index (HDI) and how does it relate to GDP per capita?

The Human Development Index (HDI) measures life expectancy, literacy, education, and quality of life, and ranks countries accordingly. It shows that countries with a high GDP per capita tend to have better HDI rankings, indicating a higher standard of living.

What are some misconceptions about the reasons for the differences in wealth between countries?

Some misconceptions include the belief that wealth differences are due to the lack of natural resources or inept governments, and even racial or social Darwinist stereotypes, which the video script advises to avoid.

Why is productivity considered a key factor in determining a country's wealth?

Productivity is key because it refers to the ability to produce more output per worker per hour, which directly impacts a country's GDP per capita and, consequently, its wealth.

What is an example given in the script to illustrate the relationship between productivity and wages?

The example of John's bakery is used to show that if workers can produce more donuts per hour, they can be paid more, illustrating that higher productivity can lead to higher wages.

What is the role of technology in improving productivity?

Technology is important because it provides the organizational effectiveness and good ideas about how to combine labor and capital to produce more output with the same resources.

How did the introduction of the World Wide Web impact productivity in the US?

The introduction of the World Wide Web allowed computers in different workplaces to communicate with each other, leading to a boom in productivity as it enabled better connectivity and organization of production.

What is the significance of human capital in a country's productivity?

Human capital, which includes the education, knowledge, and skills of the workforce, is significant because it enhances a country's ability to produce goods and services more effectively, contributing to higher productivity.

How has the increase in productivity over time contributed to the standard of living?

The increase in productivity over time has resulted in higher standards of living for much of humanity, as it allows for the production of more and higher value goods and services, leading to increased wealth and improved living conditions.

Outlines

00:00

💼 Economic Wealth and Productivity

The script introduces the concept of economic wealth and productivity, questioning why some countries are rich while others are poor. It explains the use of Gross Domestic Product (GDP) and GDP per capita as measures of a country's economic output and wealth. The importance of productivity in determining a country's wealth is highlighted, with examples of Singapore and Switzerland to illustrate that natural resources are not the sole determinants of wealth. The script also discusses the limitations of GDP as a measure of happiness and well-being, referencing the United Nations' Human Development Index (HDI) as a more comprehensive measure of a country's standard of living.

05:02

🌟 Factors of Production and Technological Advancement

This paragraph delves into the factors that contribute to a country's productivity, which is identified as the key to wealth. It outlines the traditional factors of production: land (natural resources), labor (workers), and capital (machines, factories, infrastructure), with a special emphasis on human capital, which includes education, knowledge, and skills. The paragraph explains how the effective use of these resources, combined with technological advancements and organizational improvements, leads to increased productivity. The role of the internet and connectivity in boosting productivity in the US is highlighted, along with the historical growth of productivity and its impact on living standards. The paragraph concludes by emphasizing the importance of productivity in the success of countries and the improvement in living standards globally.

Keywords

💡GDP

Gross Domestic Product (GDP) is the total market value of all goods and services newly produced in a country within a year. It is a key economic indicator used to measure the size and health of an economy. In the video, GDP is discussed to differentiate between countries' economic outputs, with a focus on why some countries have higher GDPs than others.

💡GDP per capita

GDP per capita is calculated by dividing a country's GDP by its population. It represents the average economic output per person and is used to gauge the standard of living within a country. The script emphasizes that a high GDP per capita is an indicator of a country being considered rich, as it reflects the output and potential income per individual.

💡Productivity

Productivity refers to the efficiency with which goods and services are produced. It is the main reason economists believe some countries are rich, as it indicates the output per worker per hour. The video uses the example of a bakery to illustrate how increased productivity can lead to higher wages and economic growth.

💡Human Development Index (HDI)

The Human Development Index (HDI) is a composite index that measures key aspects of human development, including life expectancy, education, and per capita income. The video mentions HDI to show that countries with higher GDP per capita also tend to rank higher on the HDI, indicating a better quality of life.

💡Natural resources

Natural resources are materials and energy from nature that are used to produce goods and provide services. The script discusses the misconception that countries with abundant natural resources are necessarily rich, using the contrasting examples of Singapore and Zimbabwe to highlight that management and use of resources are more critical than their mere presence.

💡Capital

In economics, capital refers to the machinery, tools, and infrastructure used to produce goods and services. The video explains that capital, including human capital such as education and skills, is one of the factors of production that contribute to a country's productivity and economic success.

💡Technology

Technology in the economic context refers to the good ideas and methods about how to combine labor and capital to produce more efficiently. The video points out that technology, or the organizational effectiveness of production, can increase productivity without necessarily requiring more capital.

💡Connectivity

Connectivity, as discussed in the video, is the ability of computers and systems to communicate with each other, which has a significant impact on productivity. It is exemplified by the World Wide Web's role in enhancing the productivity of US workers by enabling better coordination and efficiency in various sectors.

💡Income inequality

Income inequality refers to the uneven distribution of income within a population. The script mentions that despite the US's high GDP per capita, median family incomes have not changed significantly, indicating a potential issue of income inequality that will be explored in a future episode.

💡Human capital

Human capital encompasses the education, knowledge, and skills of the workforce. The video explains that human capital is a critical component of a country's productive capacity, as it directly affects the ability of workers to produce goods and services efficiently.

💡Compounding

Compounding, in the context of the video, refers to the cumulative effect of small increases in productivity over time, leading to significant growth in living standards. The script uses the example of the US's historical productivity growth to illustrate the long-term benefits of compounding on economic development.

Highlights

Economists measure economic output by looking at Gross Domestic Product (GDP), which is the market value of all goods and services newly produced in a country in one year.

GDP per capita is used to determine a country's wealth, calculated by dividing the country's GDP by its population.

The United Nations' Human Development Index (HDI) measures life expectancy, literacy, education, and quality of life to rank countries.

Countries with a high GDP per capita tend to have lower infant mortality, poverty, and preventable diseases.

Productivity, or the ability to produce more output per worker per hour, is a key factor in a country's wealth.

US workers earn more per hour than Bangladeshi workers due to higher productivity and output.

The US GDP per capita is significantly higher today than a hundred years ago, demonstrating increased productivity over time.

Productivity can be limited by the amount workers can produce, as illustrated by the bakery example.

Productivity growth in the US was stagnant until the advent of the World Wide Web, which increased connectivity and efficiency.

Technology is a critical factor in increasing productivity, as it organizes existing resources to produce more output.

The limitations of the bakery example highlight that increasing productivity does not always equate to increased median family incomes.

Countries that are more productive can create more goods and services, leading to higher living standards.

Factors of production, including land, labor, capital, and human capital, are essential for productivity.

The organizational effectiveness, or 'technology,' is a key component in utilizing resources to increase productivity.

Developing countries have improved their living standards by investing in capital and technology.

Productivity is the single most important factor in explaining why some countries are more successful than others.

Increasing productivity has led to higher standards of living for much of humanity over the last century.

Transcripts

Adriene: Hi, I'm Adriene Hill.

Mr. Clifford: And I'm Jacob Clifford. And welcome to Crash Course Economics.

Adriene: So far we talked about GDP and how the overall economy, but we haven't really

talked about why some countries have a high GDP and others have low GDP. So, why are some

countries rich, and others poor?

Let's investigate.

Mr. Clifford: Look, a clue! Productivity!

Adriene: Hmm...

[Theme Music]

Mr. Clifford: So, if we're gonna figure out why some countries are rich and some are poor,

we have to first 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, quality of life, and it ranks countries according to their findings.

The data shows the country that have a high GDP per capita have far less infant mortality,

poverty and preventable diseases.

So, economists often used GDP per capita to measure a country's standard of living. Countries

with the lowest standard of living are the ones that are conventionally considered poor.

So, why are some countries poor?

Adriene: If you ask someone on the street, they might say the difference is due to lack

of natural resources or inept governments, that is if the person doesn't subscribe to some

antiquated racial or social Darwinist stereotypes -- but we should talk about those ideas. Well,

let's skip the racial and social Darwinists stereotypes, but resources and leadership are interesting.

First, resources. Look at Singapore: third in GDP per capita and ninth on the Human Development

Index. Or Switzerland, ninth in GDP per capita and third on the HDI. Singapore is a teeny

tiny island, and Switzerland's main natural resources is cows. And cows are great! I love

cows, love love, 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 a hundred and sixty first (161st) in

GPD per capita and a hundred and fifty sixth (156th) on the HDI. Their incompetent

and corrupt government keeps them poor.

For comparison sake, the GDP per capita in the US is 18 times higher than in Bangladesh,

and 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 8 times higher than a 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 to produce 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 you wanted to be

generous, he couldn't pay them $20 an hour. They just don't produce enough for us to cover

the cost. But 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 each 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, altogether,

earn 18 times more per hour than Bangladeshi workers, because they're able to produce 18

times more output per hour. US workers today earn 8 times more per hour than US workers

a hundred years ago, because they produce 8 times more output per hour. But not only

is US producing more stuff, 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 be

able to produce six plain donuts per hour, while workers today is able to produce 60

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, productivity is key. A country that is more productive

can create more stuff and can generate higher incomes, but in real life, it doesn't always look like that.

For example, in the US, the GDP per capita has been steadily increasing for decades,

but median family incomes haven't changed much at all. This gets to issues of income

inequality, and we're gonna 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 stuff, but also

why we have more stuff to buy. And speaking of stuff to buy, because it is socially unacceptable

somehow for me to appear in the same clothes over and over, I need 40 blouses to make this

series. That is a lot of blouses. That strains resources, pollutes the planet, and at high

levels like 40 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? Well, they need food, clothing

and housing, they need clean water and plumbing and sewers, they need hospitals and medicine,

but all those things have to be produced, so a country that produces more of these things

with fewer resources is gonna 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 a 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 everything all boils down to productivity, what makes some countries

more productive than others? Well, let's go back and look at the main ingredients that

we need to produce things, what economists call the factors of production.

First, you need land, which includes all natural resources, and then you need workers which

is labor, and then you need capital which includes machines and factories and infrastructure,

things you need to produce other things. One special type of capital is the workers' education,

knowledge and skills required to produce things. Economists call this human capital. So school's

not just about torturing you, except for PE, 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

the organizational effectiveness "technology." Think of it 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. But more capital only gets you so far; it increases your production

capacity but it also eats up some of that production 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 just about

every workplace in the US, but productivity growth in the US was flat. Then, starting

in about 1995, US productivity boomed, led by computer technology. SO what changed?

In the late 80's and early 90's, most workplace computers were individual units, plugged into

nothing but an electric outlet. They were useful for writing and printing documents,

or acting as overgrown calculators, and playing Oregon Trail, but that was about it. When

the World Wide Web came along everything changed.

It turns out that computers are far more useful when they can talk to 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 pretty

much immediately. Connectivity equals productivity. Productivity in the US boomed for the next

10 years, and wages jumped as a result.

200 years ago, productivity in the US wasn't that great, but it grew a little bit every

year. Compounding that over decades and centuries gives us 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 in technology and have seen their living standards rise.

So if you want a single, one-word answer as to why some countries are more successful

than others, here it is: Productivity. So if you look at the big picture--

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.

Thanks for watching Crash Course Economics. It was made with the help of all of these

nice people. You can improve their standard of living by supporting Crash Course at Patreon.

It's a voluntary subscription platform that allows you to pay whatever you want monthly

to help make Crash Course free for everyone forever. Thanks for watching, DFTBA.