Economics, 3rd Edition

standard of living

. Citizens of high-income countries have better nutrition, better health 

care and longer life expectancy than citizens of low-income countries, as well as more TV sets, more 

 gadgets and more cars.

Gross Domestic Product Per Capita, Current Prices US dollars 2011

Afghanistan

576

Austria

49,707

Belgium

46

,469

Benin

802

Bolivia

1,421

China

5

,445

Estonia

16

,556

Finland

49,391

Germany

43

,689

Hungary

21,732

Italy

36,116

Japan

45,903

Kenya

808

Netherlands

50,087

Norway

98,102

Portugal

22,330

Russian Federation

13,089

Spain

32,244

Sweden

56,927

Switzerland

80,391

Turkey

10

,498

United Kingdom

38,818

United States

48,442

Yemen

1,361

TABLE 1.1

productivity

 the quantity of goods and services produced from each hour of a worker or factor of production’s time

standard of living

 refers to the amount of goods and services that can be purchased by the population of a country. 

Usually measured by the inflation-adjusted (real) income per head of the population

Changes in the standard of living over time are also large. Over the last 5 years, economic growth in 

Albania has grown at about 4.68 per cent per year, in China at about 10.5 per cent a year but in Latvia the 

economy has shrunk by around 1.4 per cent over the same time period (Source: World Bank).

What explains these large differences in living standards among countries and over time? The answer 

is surprisingly simple. Almost all variation in living standards is attributable to differences in countries’ 

productivity

 – that is, the amount of goods and services produced from each hour of a worker’s time. In 

nations where workers can produce a large quantity of goods and services per unit of time, most people 

enjoy a high standard of living; in nations where workers are less productive, most people must endure a 

more meagre existence. Similarly, the growth rate of a nation’s productivity determines the growth rate 

of its average income.

The fundamental relationship between productivity and living standards is simple, but its implications 

are far-reaching. If productivity is the primary determinant of living standards, other explanations must be 

of secondary importance. For example, it might be tempting to credit trade unions or minimum wage laws 

for the rise in living standards of workers over the past 50 years. Yet the real hero of workers is their rising 

productivity.

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CHAPTER 1  TEN PRINCIPLES OF ECONOMICS  11

The relationship between productivity and living standards also has profound implications for public 

policy. When thinking about how any policy will affect living standards, the key question is how it will affect 

our ability to produce goods and services. To boost living standards, policymakers need to raise productiv-

ity by ensuring that workers are well educated, have the tools needed to produce goods and services, and 

have access to the best available technology.