Real GDP per capita measured in 2000
dollars increased from $4,900 in 1900 to $38,000 in 2006, representing
a nearly 8 fold increase. The increase in real GDP per capita is likely
to be smaller than the true increase in living standards because many of
today’s goods and services, such as antibiotics, air conditioners, and
televisions, were not available in 1900.
The most important
factor that explains increases in real GDP per capita in the long run is
labor productivity, which is the quantity of goods and services that can
be produced by one worker or by one hour of work.
The two key
factors that cause labor productivity to increase over time are the
quantity of capital per hour worked and the level of technology.
Potential real GDP is the level of real GDP attained when all firms are
producing at capacity. Historically, potential real GDP has
substantially increased over time.
Problems and Applications
There is no one correct answer to this question, but are some relevant
considerations: An income of $1,000,000 represents 20 times more
basic purchasing power than $50,000 in 2008, so one could have many
more goods and services in 1900 than 2008. Even though there were no
automatic dishwashers, microwaves, or airplanes in 1900, with
$1,000,000 one could afford to have servants wash the dishes, cook, do
the laundry, and provide other desired personal services. One could
travel in private train cars and in luxurious suites on ocean liners. With
an income of $1,000,000 in you could live what in many ways would
be a more luxurious life than with an income of $50,000 today.
However, you would not have available television, personal computers,
the Internet, movies, iPods, DVD players, cell phones or many other
goods that today we often think of as necessities. So, a person living
with an income of $50,000 in 2008 might in fact enjoy a higher living
standard than a person living with an income of $1 million in 1900.
Increases in real GDP per capita not only increase the amount of
goods and services available to a country’s citizens, but also increase
life expectancy at birth and allow people to have a higher portion of
leisure time over the course of their lives.
A positive relationship
between economic prosperity and life expectancy may be due to
increased spending on health care in an economy with a higher income