Human capital and capital are limited and distributed unevenly throughout the world and amongst people. Each person and nation has advantages and disadvantages, assets and liabilities. What constitutes wealth consist of different goods and services for each individual. When comparing other poorer countries to wealthier countries there is more inequality and limited resources. However, even though a country may be poorer than another country it may produce goods and services at the lowest relative cost. How can firms and markets increase the wealth of poor countries?
Let’s take for example firms from the United States and Japan, although not poor countries, each firm produce many of the same good. Apple and Sony compete for the same customers in the market for digital music players. Ford and Toyota compete for the same customers in the market for automobiles. Although these firms compete, when countries trade with each other they both become better off. Thus countries benefit from their ability to trade. A country’s standard of living depends on its ability to produce goods and services. The differences in living standards are staggering.
In 2008, the average American had an income of about $47,000. In the same year, the average Mexican earned about $10,000 and the average Nigerian earned only $1 ,400. This variation in average income is reflected in various measures of the quality of life (Manama, 2012). People that reside in high- income countries have more flat screen televisions, cars, better nutrition, better healthcare and a longer life expectancy that people of low-income countries. The cause of the large differences in living standards among countries is attributed to differences in countries’ productivity.
This mean the amount of goods and services produced form each unit of labor input. In the countries where workers can produce a large quantity of goods and services per unit f time, most people enjoy a high standard of living; in those countries that produce less or less productive, most people endure a more meager existence. Sometimes productivity and living standards have profound implications for public policy. Policy may sometimes affect living standards depending on how it affects a countries ability to produce goods and services.
Policy makers may attempt to raise productivity by ensuring that workers are well educated, have the tools needed to produce goods and services and access to the best available technology. Moreover, the management of society’s resources is important cause resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. This means in order for a country of people to get one thing they must give up another thing.
The more a country may spends on their national defense (guns) to protect itself from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living for its people. This trade-off is called guns versus butter. Other trade-offs are food versus clothing, leisure time versus work and efficiency versus equity. A country may focus more on food production than producing clothing. Another trade-off between efficiency and equality where efficiency means that society is getting the maximum benefits from its scarce resources.
Equality means that those benefits are distributed uniformly among society members. A trade-off between a clean environment and high level income may exist in countries whose laws require that a firm reduces pollution. Because of high cost, firms earn lower profits, pay lower wages, and charge higher prices or a combination of the three. In each of these trade-offs people of countries make decision on what is more important to produce and what will increase their standard of living. The government of countries design policies which aimed at equalizing the distribution of well-being but they often cause conflict.
For example when the government redistributes income from the rich to the poor, it reduces the reward for working hard, as a result, people tend to work less and produce fewer goods and services (Manama, 2012). People of poorer countries as well as richer countries are rational thinkers who understand the cost of something is what you give up to get it. These rational thinkers often make decisions by comparing marginal benefits and marginal costs. The benefit must exceed the cost. Poorer countries like richer ones also understand that people respond to incentives (Sunken, 2014).
Policy makers and firms alike realize that policies change the cost or benefit that people face, and alter their behavior. As aforementioned, trade among countries makes each of them better. It allows each country to specialize it in activities it does best, despite competition. A country’s government can improve market out comes by retention the property rights of individuals and institutions that are vital and key to a market economy. A country’s standard of living depends on its ability to produce goods and services (Sunken, 2014).
Poorer countries like richer countries are also affected by inflation. Inflation is generally understood as the general rise in price levels in nominal terms, which normally corresponds to a loss of purchasing power in real terms. There are variants of inflation and how it plays out in various terms in the economics universe, i. E. Stagflation, hyperinflation, disinflation, wage inflation, etc. Economist Harlan Smith points out four different causes of inflation. Smith explains that causes of inflation can be traced to: demand-pull, cost-push, pricing power, and sectarian inflation.
Tom Au adds another important type of inflation to consider, especially for our contemporary world: foreign exchange inflation as related to currency value. Of all these causes, multiple ones can act in conjunction to produce inflation (Au, 2015). According to infeasible. Com, the 10 countries with the world’s highest inflation rates for 2008 were Zanzibar (12,358%), Burma (35%), Guiana (23. 4%), San Tome and Principle (18. %), Yemen (1 8%), Ethiopia (17. 2%), Iran (17. 1%), Reiterate (17%), Democratic Republic of 6 the Congo (16. 7%), and Azerbaijan (16. 7%).
Of these ten inflation-infested countries, The World Bank classifies eight of them as “low-income” countries (having a 2007 IN per capita figure of $935 or lower), and the other two as “lower-middle-income” countries (having a 2007 per capita IN between $936-$3,705) (Au, 2015). Lastly, poorer countries like richer ones may increase the amount of money in the economy to stimulate the overall level of spending and thus the demand for and services. However, higher demand ay over time cause firms to raise prices, although it encourages them to hire more workers and produce a larger quantity.
More hiring then leads to lower unemployment. The bottom line is that poorer countries and not much different from richer countries with the exception of some differences in things like technology, medical, laws, production, etc.