NARRATOR: The Pacific Rim



Principles of Economics

by N Gregory Mankiw

The Video Series script

Principle #8 A Country’s Standard of Living Depends on Its

Ability to Produce Goods and Services

The Pacific Rim. For over fifty years, it has enjoyed seemingly limitless economic expansion spurred on by the ever-increasing productivity of its countries.

With this productivity has come a natural growth in the standard of living for the citizens of this part of the world. This relationship between productivity and standard of living is not accidental. It underpins one of the most important principles of economics:

A country's standard of living depends on it’s ability to produce goods and services.

Economists define Productivity as the quantity of goods and services that a worker can produce for each hour of work. To understand how this relates to standard of living, let’s take a closer look at Japan.

Just a short half century ago, Japan lay in ruins. Defeated at the end of the war, Japan had to build up both its industrial and agricultural industries from the devastation of war. In order to do this, they had to move from a war time economy to a peace time economy. The main industry would no longer be supplying a national war effort; now it would have to create goods which could compete in the international marketplace.

The war time destruction of the Japanese economy led to an equally devastating standard of living for its people. Impoverished and starving, the Japanese people were forced to rebuild their shattered nation.

When Japan began the job of repairing its nation, it also started to improve its standard of living. In order to accomplish this, it first had to assess its potential productivity in light of four determining factors:

Physical Capital

Human Capital

Natural Resources

Technological Knowledge

In the years following the war, Japan began to raise its industrial base from the ashes. To do this it had to rebuild its stock of equipment and structures used to produce goods and services.

Factories sprouted quickly, most geared toward the creation of low cost, quickly made goods such as toys and novelty items. In fact, the term “Made in Japan” became synonymous with low quality. This would soon change. But, while the world scoffed, the Japanese leaders understood that this increased productivity had a very important benefit.

By doing this, Japan increased the knowledge and skills of its workers. This was an important opportunity to train and educate the tradition-bound Japanese people in the ways and means of modern manufacturing.

The people quickly learned the art of efficient, cost-effective manufacturing. By the mid-1950's, Japan’s industrial skill and capacity had increased to the point where unemployment was practically erased.

Natural resources, the renewable and non-renewable assets that are provided by nature, such as land rivers and mineral deposits, are very limited in Japan.

Its relatively small size and rock terrain would keep natural resources at a minimum. It was necessary for Japan to compensate for this deficiency. They decided to focus on another important economic factor.

Japan would become a world leader in technological knowledge and skill.

In order to build up Japan’s technological knowledge, the government sent engineers and business leaders to study the industrial methods of the West. It took very little time for them to realize that the greatest needs for the future were in the booming fields of automotive and electronics.

Armed with this information, the Japanese business leaders set about converting their industrial plants to these lucrative goods.

The Japanese people, now well trained in the assembly line process, needed only to apply their skills to different products.

Seemingly overnight, the term “Made in Japan” became not an expression of contempt but a byword for the world class quality in both manufacture and use.

This understanding of the value of productivity brought with it a striking increase in the standard of living for the Japanese people. Soon, they were making enough money not only to buy the goods they produced but also to purchase goods imported from around the world.

Japan discovered that the secret to a high standard of living lies in maintaining a high level of productivity.

This discovery has brought a bright future of economic prosperity for the Pacific Rim, and this is a lesson that they are sharing with the world.

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