Other factors affecting our living standards
Do you recall that Krugman said that productivity was “almost” everything. Well, there are other factors that affect living standards but not as consistently over the long-term as productivity does.
These other factors are:
- employment to population ratio
- terms of trade
How does Employment to Population Ratio Affect Living Standards?
The employment to population ratio is a statistic used in economics to indicate the ratio of those currently employed to the total population. In the chart below, you can see that in Australia the employment to population ratio rose to a peak in 2010 and then began to slowly decline. This pattern is mostly due to population ageing – this was mainly caused by the number of births slowing down after the war, combined with a rise in the length of time (number of years) people were living.
How do Terms of Trade Affect Living Standards?
The terms of trade is the ratio of our export prices to our import prices. Australia has very little power over either – it is a price taker. The terms of trade affect the purchasing power of our GDP – that is, what we can buy with what we produce, and it therefore affects our living standards. The terms of trade nearly doubled from 2005 to 2011 and then fell by about 50% over the next few years.
Both the terms of trade and the employment to population ratio tend to fluctuate much more than productivity. Productivity is far more stable. Krugman was right: productivity is ‘almost everything’ in driving economic growth and living standards.
Share your comments on this article or ask any questions you have about these factors via the comments link.
Reserve Bank of Australia. (2017a). Employment to population ratio. Retrieved from http://www.rba.gov.au/statistics/
Reserve Bank of Australia. (2017b). Terms of trade - Index Numbers 2009=100. Retrieved from http://www.rba.gov.au/statistics/
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