A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Mankiw outlined the claim that a country’s standard of living depends on its ability to produce goods and services as his eight principles of economics (Barr, 2020). In his claim, he says that the average income of a country portrays its living standards, and the productivity of that country represents its ability to produce goods and services. The argument made by him is that the increase or the growth in the productivity of a country leads to the growth of the country’s average income (Barr, 2020). This means that if the ability of a country to produce goods and services increases, the standards of living in that country also increases.
In this case, the average wage is taken as the wage that the majority of the people get and one that can help people improve their living standards. If people earn more, they will end up with more money to spend, and their living standards will definitely increase. The determinants of better living standards will be achieved, with people being able to access quality healthcare, more cars, better nutrition, and higher life expectancy (Barr, 2020). However, as per the claim, the only way to achieve a higher average wage is to increase productivity. As such, productivity is the main thing that countries should enhance in their efforts to improve the living standards of their citizens. To ensure that the productivity of a country is raised, it is expected that workers are to be well educated, skilled, provided with the right tools for productivity, and have access to be the best technology out there. This way, they will be productive, and the productivity of the country will be high. Also, the issue of wages will also be high, meaning that the living standards will also be high. This is what Mankiw stated as the meaning of his eighth economic law.
Though some claims support this eighth law of economics by Mankiw, other claims are against it. First, the use of average wage is disputed, as it does not take into account other determinants of wages such as labor union prevalence and the laws outlining the minimum wage within a country (Korhonen, Honkasalo, & Seppälä, 2018). These two are determinants of income and should not be neglected when one is looking at the living standards of people. This makes the claim made by Mankiw a bit dishonest, and one that can be validated.
Average income is not the best income to test the living standards of the people. Other incomes such as median incomes and income of the people working in a particular country would be more effective than this. As a matter of fact, the use of wages is not the best way that one can use to gauge the productivity of a country (Barr, 2020). A representation by the 2014 US bureau of labor and statistics showed that there was a huge disparity at some point between productivity and the wages paid (Sprague, 2014, May). A point is reached whereby productivity increases with only the higher-level workers being paid more, yet the minority, those who are on the bottom half of the organization, end up being underpaid or paid at a constant price. This is a point that various organizations have achieved for their operations. As such, the productivity of a country can increase without even necessarily increasing the wages that are paid to the employees (Sprague, 2014, May). This means that the employees’ wages will be constant or even poor, translating to lower living standards, as they do not have much to spend and improve their livelihood.
In conclusion, one can see that the claim that the living standards of a country depend on its ability to produce goods and services might not be right. Though there is evidence by checking the productivity of developed nations and comparing this with that of developing nations, the claim still has too much evidence to the contrary. Countries have been gaining in productivity with their employees’ average wage remaining constant. This works to disregard this claim.
References
Barr, N. (2020). Economics of the welfare state. Oxford University Press, USA.
Korhonen, J., Honkasalo, A., & Seppälä, J. (2018). Circular economy: the concept and its limitations. Ecological economics, 143, 37-46.
Sprague, S. (2014, May). What can labor productivity tell us about the US economy? Retrieved from https://www.bls.gov/opub/btn/volume-3/what-can-labor-productivity-tell-us-about-the-us-economy.htm