The factors of production — practice question

Since 2012, the United Nations has issued a World Happiness Index each year. Countries are ordered in this index using life expectancy, freedom, social support, trust, generosity and GDP per head. In 2019, New Zealand was placed 8th in the World Happiness Index. The governments of Bhutan and New Zealand now take account of several factors that affect how happy their populations are. More than half of Bhutan’s labour force works in agriculture, whereas in New Zealand most workers are employed in the tertiary sector. Conditions at work, hours worked, the nature of the job and pay differ across the primary and tertiary sectors. Productivity is greater in every sector in New Zealand than in Bhutan. One reason is that New Zealand has invested more in capital goods and education. New Zealand also records a higher GDP per head. GDP per head ($) can affect net migration (number of people), as illustrated for selected countries in 2017 in Fig. 1.1. In its 2019 budget, the New Zealand government stated that progress would be judged not by rises in GDP, but by improvements in the quality of people’s lives. To do this, it announced extra spending in several areas including mental health, child poverty and pollution. Some economists said this was the wrong approach. They argued that the most effective way for the government to raise living standards would be to cut income tax rates. Such a cut could alter government spending and the amount of goods that people purchase, including cars. Tax revenue in New Zealand rose in 2019, in part because corporation tax revenue increased. Even so, firms’ future profits were hard to forecast. This was because it was uncertain what would happen to GDP and to corporation tax rates.