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.
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