1
$\begingroup$

If a country had economic growth last year (2015) does that mean that the average citizen had a better buying power in that year (2015) than in the previous year (2014)?
For example with their monthly wage they could buy 800 kilos of rice in 2015 up from 700 kilos in 2014.

Or to put it in other words: can an country have economic growth while in the same time the average citizen face a reduced buying power (for example by increased prices of commodities) in the same period of time?

$\endgroup$
1
$\begingroup$

Probably no, not in the same year. But maybe in the year after.

If you're talking about the average citizen, the intensity of this expansion of buying power depends on wealth distribution, the importance of those industries which had grown and whether those industries are more labor intensive or capital intensive.

Also, this expansion doesn't happen instantly; don't expect that the whole nation will realize this growth in the same year that it happened. It takes time for the money to flow from the main industries to industries of the same network and than to other firms not related.

That process is even slower through the employee chain. One of the reasons is that frequently employee and employer negotiate salary for long periods (there's some "stickiness"). When a type of workforce is unionized, it takes even more time for them to negotiate wages as a group.

The pathway you're asking about is like this: More production means the industries needs to increase their capital, inputs and workforce. They buy more capital, more inputs and hire more workers. This increase in demand means those other industries and workers are able to negotiate better salaries than in the year before. To be able to satisfy this new demand, the industries that produce capital and input need to increase their production as well, by hiring more workers, buying capital and inputs. And this goes on and on till it,theoretically, affects the lower paying jobs. Of course it all depends on how much the links in the chain pass the wage increase to the next link.

$\endgroup$
  • $\begingroup$ Thanks for your answer but you don't need more money in order to have a better buying power. It's enough if the prices of the commodities go down, thanks to increased productivity. $\endgroup$ – Joe Jobs Feb 3 '16 at 21:14
  • $\begingroup$ And what happens if the country has economic growth of 10% but the price of commodities get a 50% increase in the same year? The average Joe gets reduced buying power and increased poverty. Can we call that "economic growth"? $\endgroup$ – Joe Jobs Feb 6 '16 at 17:30

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.