The table above shows Gross Domestic Product of top 20 countries in the world of today & estimation of 2050. As we can see US GDP today is twice as of China but in 2050, China’s GDP is expected to surpass America & become the largest economy in the world. Germany, the largest economy in Europe, ranks 4th globally today but in 2050, Germany is estimated to drop to 12th position.
These data shows that the richest country in the world today may not stay richest in the next decade & the same rule applies to poorest country. So what is the economical push that can change these economy’s position? Why do some countries move ahead while some step back? We’ll find out.
Productivity: Its Role & Determinants
Productivity represents the quantity of goods & services that 1 unit of labor can produce in a fixed amount of time. To know why productivity is important, we imagine a situation that you get lost in the ocean & land on an island.
To survive, you’ll catch fish & collect water. The amount of fish & water you can have in the end is your productivity. If you have more experience and productivity, you can catch more fish & water then you can have a better dinner or you can spend less time fishing & use that time to make your living shelter more comfortable.
The law of productivity can impact individuals as well as nations. Recall that GDP measures both income & expenditure, USA has higher GDP than Nigeria because Americans are more productive, they make more & spend more than Nigerians. Analysts use productivity to estimate GDP growth of many nations all the way until 2050 as we see earlier. Then the question changes to why are some economies so much better as producing than others?
The answer to that question relies on many factors that directly impact the growth of an economy. Those factors are:
Physical Capital or just capital is the stock of equipment or structure that support workers in the economy. If workers have better saws, screw drivers & drills, they can make a product more quickly & move on to the next.
Human Capital is the knowledge & skill that a worker has from education, training & experience. Human capital is less tangible than physical capital & it can be transferred form one form to another. 1 good studying habit can be transformed to a good working habit.
Natural Resource is the 3rd determinant of productivity. In a day, workers in Arab Saudi & dig more oil than in Mexico because Arab Saudi has more oil reserve than Mexico. But natural resource is not the key factors of productivity, Japan is the 3rd richest country in the world but they have very few natural resource. There are 2 types of natural resource:
Renewable resource such as tree. When a tree is chopped down, its seed can grow to be another tree to replace the dead one.
Nonrenewable resource is oil. Once oil is extracted from the field, nothing can replace that lost oil.
Technological Knowledge is the understanding of the best way to produce goods & services. A 100 years ago, most Americans worked on farm to produce crops but thanks technological advancement, we only need a few workers to make more products in the same amount of time.
Some technology is common knowledge, if 1 person uses it, the rest will copy & do the same. When Ford first introduced the assembly line, others automakers quickly followed & did the same thing.
Other technology is proprietary, it’s only known by those who make it. The secret of Coca Cola is only known by Coca Cola itself.
Economic Growth & Public Policy
There’re many ways policy makers can do to increase productivity of workers & companies in the country such as:
Saving & Investment: Because capital can produce factor of production, an increase in capital will lead to an increase in production or productivity. If many people invest money in Apple, Apple will have more money to research & provide products with better technology & increase users’ productivity. But…