Question

Define: a. absolute real economic growth b. per capita real economic growth c. human capital

Short answer

a. Absolute real economic growth refers to the total increase in the value of goods and services produced by an economy over a period, adjusted for inflation. b. Per Capita real economic growth is the average economic output per person, measured by dividing the real GDP by total population size. c. Human capital is the value that the labor force, through their skills, education, and behaviors, adds to the economy.

Step-by-step solution

Define Absolute Real Economic Growth

Absolute real economic growth refers to the total increase in the value of goods and services produced by an economy over a certain period, typically a year, taking into account inflation. It is calculated by comparing the Gross Domestic Product (GDP) of one year to the previous year, allowing for changes in the price level, thus providing a 'real' picture of growth.

Define Per Capita Real Economic Growth

Per capita real economic growth is a measure of the average economic output per person, calculated by dividing the country's real GDP by its total population. It is a more accurate reflection of living standards and economic wellbeing than absolute economic growth, as it takes into account population size.

Define Human Capital

Human capital refers to the stock of habits, knowledge, social and personality attributes embodied in the ability to perform labor so as to produce economic value. In other words, it represents the value that the labor force adds to the economy, which includes skills, education, health, and behaviors of individuals. Economists view it as a factor of production, along with physical capital and land.

Key concepts

Absolute Real Economic Growth

Understanding the scale and scope of an economy's growth is crucial for both policy makers and business owners. Absolute real economic growth acts as a broad indicator of economic progress without the misleading effect of inflation. It is determined by examining the total output of goods and services—referred to as the real Gross Domestic Product (GDP)—over a set time frame, often annually.

For example, if Country X's GDP in 2020 was \(1 trillion and it rose to \)1.05 trillion in 2021, the absolute real growth rate would be 5%, assuming the prices have been adjusted for inflation. This figure tells us the economy has expanded, but it doesn't account for population growth, which may dilute the actual improvement in living standards. That's where the perspective of per capita growth becomes significant.

Per Capita Real Economic Growth

To get a more nuanced picture of economic growth, analysts often use per capita real economic growth. This metric divides the country's real GDP by the total population, providing an average economic output per individual.

It is a valuable measure in understanding whether the country's economic growth is translating into better living standards for its citizens. For instance, if Country X's per capita real GDP increased from \(30,000 to \)32,000, citizens are on average, theoretically wealthier. However, this does not always account for the distribution of this wealth, which could be disproportionately allocated to a small segment of the population. Therefore, while per capita real economic growth is a more accurate gauge of economic wellbeing than absolute growth, it is not without its limitations.

Human Capital

The human element in economic processes is encapsulated in the concept of human capital. Just as investments are made into physical capital like machinery, investments in education, training, and health can enhance the productivity and efficiency of the workforce, which is the essence of human capital.

Skilled workers contribute more to production and innovation, elevating a country's competitiveness on a global scale. For instance, an engineer who invents a more efficient engine adds immense value—beyond just their labor—to their industry and economy. Human capital often determines the pace and sustainability of economic growth, as it influences both the supply and demand sides of the market.

Real Gross Domestic Product

The sum total of all goods and services produced at their market values within a country's borders is known as its real Gross Domestic Product, or real GDP. This economic metric is crucial because, unlike nominal GDP, it adjusts for price changes over time due to inflation or deflation.

Therefore, real GDP provides a more accurate depiction of an economy's size and growth rate. For example, if inflation is high, nominal GDP might appear to grow even when the actual quantity of goods and services produced remains the same. By removing the 'price effect', real GDP allows for meaningful comparisons over time and between different economies.

Economic Wellbeing

A broad and somewhat subjective concept, economic wellbeing refers to the overall quality of life and prosperity experienced by individuals and societies. It extends beyond the hard numbers of GDP or income per capita to include factors like job security, income distribution, environmental quality, and access to healthcare and education.

Effective economic policies often aim to enhance economic wellbeing by fostering sustainable development and equitable growth. This may involve investing in human capital, technological innovation, and infrastructure while ensuring the benefits of growth are broadly shared. It's essential to acknowledge that an individual's or nation's economic wellbeing isn't solely determined by wealth but also by their ability to lead fulfilling lives with access to necessary resources and opportunities.