Question 5*

A conventional measure of long run living standards is by comparison of real GDP per capita as a
measure of a countries development. While GDP itself, and therefore GDP per capita, are not a
perfect measure of living standards due to the effects of leisure time, household work etc, there is
still a positive correlation between living standards and GDP. Real GDP per capita can be defined as
GDP/POP where POP = population. This can be split into two components: GDP/N x N/POP (where N
= number of employed workers). These two components separately are average labour productivity
and share of population in employment respectively. As the average labour productivity increases so
does total production, which increases the real GDP per capita, thereby increasing living standards.
The Japanese government would need to produce policies which act on demand to minimise the
GDP gap and also raise potential by focusing on increasing productivity. Productivity can be
improved through focusing on changes that could be made to corporate governance to ensure more
efficient and effective work. In addition to this, Japan could also implement policies which shift its
economy to a more service based economy. This would include lowering barriers to entry and
allowing easier trade but also implementing good language skills and awareness of the outside
world.
The main factors that can contribute of effect labour productivity include:
Human capital- the net assets and skills a worker can bring to a role. The more human
capital they have the more they can contribute, thereby increasing productivity.
Physical capital- stock of physical goods (factories, machines etc) available to be used by
workers. Consideration should also be given to the law of diminishing returns of capital
Land and natural resources- access to land and natural materials available
Technology- advancements in technology can lead to more efficient processes that can
increase productivity
Management- can influence the nature and process of production. They influence the
organisation of production and distribution as well as providing motivation for workers.
Political and Legal environment- political and legal conditions can influence productivity. For
example, political instability can create uncertainty about future economic conditions and
stifle entrepreneurial spirit and investment.
Japans lower level of productivity can be attributed to its labour supply and variation in productivity
across different sectors. The declining labour supply can be attributed to an ageing population. The
possible solutions to this include raising the retirement age, increasing immigration or trade, or
increasing the participation rate have possible problems related to the political and legal
environment mentioned in part iii). However, while they pose political difficulty they can still be
implemented. To make up for the lower labour supply there must also be an increased productivity
from the workforce, and an effort to decrease the variation in productivity across the different
sectors. This can be influenced by management, physical capital and be lowering barriers to entry to
increase trade of services.

Japans labour supply
Reference:
Corbett, Jenny (2012) Growth: getting Japan back on track East Asia Forum
http://www.eastasiaforum.org/2012/11/28/growth-getting-japan-back-on-track/