1. 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 is to look at growth as the percentage increase in the per capita real GDP.

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.

2. 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.

3. 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 increase 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.

4. Why has U.S. productivity changed?

The growth rate of total factor productivity (TFP) in the United States has decreased over the last several decades. Between 1948 and 1965, TFP grew at an average rate of about 2 percent. Since the 1970s, TFP growth has averaged less than one percent per year. Several changes in the U.S. economy help account for this drop, including a drop in the quality of the U.S. labor force; a drop-off in technological innovation, as shown by the decrease in the number of patents issued to U.S. firms; increases in energy prices; and the shift from manufacturing to service industries.