Lesson 4, Topic 1
In Progress

What determines GDP per capita?

Abdulaziz July 23, 2020
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Countries by GDP (PPP) per capita ($) in 2019 according to the IMF >50,000 (dark blue), <2,000 (ligth blue), Data unavailable (grey)

Economic growth means long-term increases in real GDP. But a better thing to look at for the standards living of people is real GDP per capita. The size of the economic pie may increase, but if we have more people in the country, each person will get a smaller piece.

In the long run participation rate depends on demographics, culture and so on. We will ignore it. Employment rate is more or less constant (for the US at about 95%). So we will ignore it as well. So the long-run question really boils down to this: “what determines output per worker or average labor productivity?” To answer this question we start with the obvious: the production function.