The Economics of Income: The Rich Nations Mystery

STUDENT'S VERSION

This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student

TASK

  • Compare the difference between GNP and GDP. 
  • Predict the standard of living of a country by using productivity as a determinant. 
  • Investigate all that goes into determining a country's standard of living. 
  • Infer on statistics that give economic freedom to countries. 

PROCESS

It has just been announced that in the interest of world harmony, all students are required to move to another country. You must now choose your new homeland. Try to select a country or region that you think has a high standard of living. Look over these selections and make your choice. 

Country 1: Population: 50,447,719
                       Area: 603,700 sq km
                       Natural Resources: iron ore, coal, manganese,                                                  natural gas, oil, salt, sulfur, graphite, titanium,                                                  magnesium, kaolin, nickel, mercury, timber. 
Country 2: Population: 24,317,000
                       Area: 120,540 sq km
                       Natural Resources: coal, lead, tungsten, zinc, graphite,                                magnesite, iron ore, copper, gold, pyrites, salt, fluorspar, hydropower.
Country 3: Population: 1,221,591,778
                        Area: 9,326,410 sq km
                        Natural Resources: coal, iron ore, petroleum, mercury, tin, tungsten, antimony,                                       manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, uranium,                                     hydropower potential (world's largest).                           
Country 4: Population: 6,547,189
                        Area: 1,092 sq km
                        Natural Resources: outstanding deepwater harbor, feldspar.
Country 5: Population: 7,240,463
                        Area: 41,290 sq km
                        Natural Resources: hydropower potential, timber, salt. 
Country 6: Population: 45,948,811
                        Area: 98,480 sq km
                        Natural Resources: coal, tungsten, graphite, molybdenum, lead, hydropower.
 

 

Here is some more information about each country or region. 

1: Ukraine: GDP $161 Billion 
                         GDP per capita $3,170
2: North Korea: GDP $20.9 Billion 
                                   GDP per capita $900
3: China: GDP $3,390 Billion 
                     GDP per capita $2,800
4: Hong Kong: GDP $163 Billion 
                                 GDP per captia $26,000
5: Switzerland: GDP $161 Billion 
                                 GDP per capita $22,600
6: South Korea: GDP $647 Billion
                                  GDP per capita $14,200
 

Consider this:

Family A has an income of $80,000 per year. Family B has an income of $60,000 per year. Which sounds better? Let's analyze this information: Family A has 2 parents and 8 children. Family B has 2 parents and 1 child. Which family will be able to acquire more goods and services per person? Family A has only $8,000 per person, while Family B has $20,000 per person. 
 

An Economic Mystery:

How could a country that has fewer resources produce more output per person than a country that has more natrual resources? For example, China is rich in natural resources, but has a low per capita GDP (due to its large population). South Korea has fewer natural resources, but still has a higher per capita GDP. How can South Korea have more goods and services than China?

Let's investigate by reading Productivity by Economist Alexander J. Field from the Concise Encyclopedia of Economics listed in the resources above.  
 

Now let's investigate what factors increase productivity: 

Read the segment from the World bank in the resources and think about these questions: What is GNP or GDP What does "per capita" mean? What does a country need to do to grow and increase its GNP/GDP per capita?

CONCLUSION

The number of people sharing the income makes a difference. 

Likewise, though GDP shows how much output a country produces, the population makes a difference. GDP per capita shows how much output is produced per member of the population. List the countries from the highest GDP per capita to the lowest. GDP per captia shows where people are likely to have the most goods and services per person, and therefore, the highest standard of living. 

Now let's answer the mystery. 

How can a country that has fewer natural produce more output per person than a country that has more natural resources? The answer: The key is productivity. Productivity depends on land (peoples' health, education, and work skills). Some rich countries have abundant natural resources, and some have relatively few; however, virtually all rich countries high levels of capital investment and technology, and a highly educated population. Almost all rich countries have a high degree of encourage trade and access to world markets. 

ASSESSMENT ACTIVITY

-You had to make your choice without all of the information you needed. Now that you have more data, which single figure would you rely on to determine whether a country was rich or poor? Was it GDP (Gross Domestic Product)? GDP is the value of all the goods and services a country produces per year. Which of those above has the highest GDP? 

-From this group, China has the highest GDP. Most people consider China to be relatively poor. Why? 
 

  1. Answer the following questions by using An Economic Mystery from the procedure. 

    -What did Professor Alexander J. Field say "is the fundamental determinant of the growth of a country's material standard of living?" 
                 
                1. What is the prime determinant of the average standard of living in any nation?
                2. What is productivity?
                3. Why does productivity increase the standard of living in a nation?   
     
  2. Answer the following questions after reading GNP per Capita. 

                 1. What is GNP per capita? How is it calculated? 
                 2. Why would one prefer to live in a country to with a high GDP per capita?
                 3. What do countries with high GDP or GNP per capita have in common?
                 4. What is productivity and how does it influence GNP per capita?
                 5. According to your reading, what are some of the factors that encourage                                                 productivity and economic growth?  

EXTENSION ACTIVITY

International Research Project                                          

Let's explore several countries and find the factors that countries with high per capita GDP have in common, and the factors countries with low per capita GDP have in common.                                                                  

Working individually, or in teams explore these countries.
What factors make a nation rich?

  • North Korea
  • South Korea
  • Hong Kong
  • Switzerland
  • China
  • Ukraine
  • United States

Make a table with these along one side:

  1. GNP or GDP
  2. Population
  3. Calculate GNP or GDP per capita
  4. Growth in GNP or GDP (growth rate)
  5. Labor force
  6. Productivity (GDP/labor force)
  7. Economic Freedom
  8. Protection of Contracts and Private Property
  9. Limited government intervention
  10. Market or Command Oriented economy
  11. Educated work force (Low illiteracy rate)
  12. Openness to trade
  13. Low taxes
  14. Availability of good transportation and communication
  15. Availability of technology
  16. Capital stock per worker
  17. Infant mortality
  18. Life expectancy

Here are some online sources to help you with your research: For a description of each economy including the GDP per capita, the growth rate, degree of market orientation, communication, transportation, infant mortality, life expectancy, literacy rate, openness to trade check the CIA World Factbook;https://www.cia.gov/library/publications/the-world-factbook/index.html

To find statistics on protection of property rights, economic freedom ratings, openness to trade, and limited government intervention, (1-5, with 1 being most desirable) go to the Index of Economic Freedom Rankings at the Heritage Foundation; www.heritage.org http://www.heritage.org/index/

Please collect the data and complete the form for one country. Compare the results from your country with the results of other students. Rank the countries from highest GDP to lowest GDP. What features do the top 3 have in common? What features do the bottom 3 have in common? Why are some nations rich, and some nations poor?

Did high GDP per capita countries have

High levels of Economic Freedom?

government support of contracts and private property?

limited government intervention?

market oriented economies?

educated workforces?

openness to trade?

low tax rates?

Compare these countries. Look at others. What do you think? List elements which seem to correlate with countries that have a higher standard of living. Why do you think that each element would contribute to higher productivity? Which would contribute to a higher standard of living?