, Sixth Edition
Fundamental Question Review
- What is economic growth?
Economists define economic growth as an increase in real national income, usually measured in terms of the percentage increase in real gross national product (GNP) or real gross domestic product (GDP). An alternative way of defining economic growth, one that more clearly shows growth's effects on individual people, is to look at growth as the percentage increase in the per capita real GDP: to look at changes in real GDP per person in the economy. After all, if real GDP increases 5 percent at the same time population increases 5 percent, real GDP may be higher, but the people in the economy are no better off than before: the increase in output is only enough to keep everyone at the same level as before. In this case, per capita real GDP would show no growth.
Although growth in per capita real GDP shows us how much is available to consume per person, it does not tell us everything about people's standards of living; we also need to look at income distribution and the quality of life. If all of the increase in output goes to a small proportion of the people within a country, most people's standard of living will be unchanged. If economic growth is accompanied by large decreases in environmental quality (more pollution, less wilderness, and so forth), many people may feel that their quality of life has decreased rather than increased.
- How are economic growth rates determined?
Economic growth means a shift rightward of the aggregate supply curve, increasing the potential output of the economy. A country's economic growth rate is determined by the factors that determine the aggregate supply curve: the amount of productive resources available and technology. The faster the growth of productive resources and technological advancement, the higher a country's growth rate will be.
- What is productivity?
Productivity is one way to look at the impact of advances in technology on economic growth. Productivity is the ratio of output produced to the amount of input used. Improvements in technology mean that productivity increases as we find new and better ways to use inputs to produce output. More specifically, total factor productivity (TFP) is a nation's output divided by its stock of labor and capital. Economic growth is the sum of the growth rate of total factor productivity and the growth rate of available resources.
- What explains productivity changes?
Anything that affects how goods and services are produced can affect productivity. These factors include changes in the quality of labor, changes in the frequency of technological innovations, changes in energy prices, and a shift away from manufacturing toward services. Less obviously, the development of financial markets can affect productivity by making the allocation of resources more efficient.