Aggregate Incomes

These are my notes on aggregate incomes. Hope they are helpful.

The GDP per capita is GDP divided by the total population. Purchasing power parity constructs the cost of a representative basket of commodities in each country and uses these relative costs for comparing income across countries.

GDP per worker is defined as GDP by the number of people in employment. Productivity refers to the value of goods and services that a worker generates for each hour of work.

The one dollar a day per person poverty line is a measure of absolute poverty used by economists and other social scientists to compare the extent of poverty across countries.

Human capital is each person’s stock of skills to produce output or economic value. Physical capital is the stock of all machines and buildings used for production. The physical capital stock of an economy is the value of equipment, structures, and other non-labor inputs used in production. Technology refers to a set of devices and practices that determine how efficiently an economy uses its labor and capital. An aggregate production function describes the relationship between the aggregate GDP of a nation and its factors of production.

Total efficiency units of labor is the product of the total number of workers in the economy and the average human capital of workers. The law of diminishing marginal product states that the marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production.

Research and development refers to the activities directed at improving scientific knowledge, generating new innovations, or implementing existing knowledge in production to improve the technology of a firm or an economy.

Efficiency of production refers to the ability of an economy to produce the maximal amount of output from a given amount of factors of production and knowledge.

GDP per capita, defined as aggregate income divided by total population, varies greatly across countries, with some nations have more than 40 times the GDP per capita of other nations.

GDP per capita across countries can be compared using exchange rate based measures, which rely on current exchange rates, or purchasing power parity based measures, which compare estimates of the cost of the representative basket of commodities in each country. The latter tend to be more reliable, as they more appropriately capture differences in relative prices across countries and are not subject to fluctuations resulting from changes in exchange rates. Though GDP per capita omits a wealth of other important information on health, schooling, inequality, and poverty, it provides a good summary of prosperity, and higher GDP per capita is typically correlated with higher life expectancy, better schooling, and lower poverty.

The aggregate production function links the GDP of a nation to its total efficiency units of labor, physical capital stock, technology, and efficiency of production. Greater efficiency units of labor and physical capital, as well as better technology and efficiency of production, increase GDP.

Though the total efficiency units of labor and physical capital stock matter a great deal for GDP, the most determinant of cross-country differences in GDP per worker appears to be differences in technology and the efficiency of production.