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.
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