Economic Growth & Productivity
Economics: IB Diploma, topic 2.4.3
Economic Growth and Productivity
To analyze the sources of economic growth, it is useful to think about a production function, which is the technical relationship by which economic inputs like labor and machinery are turned into outputs.
The aggregate production function defined
- A microeconomic production function describes a firm's or perhaps an industry's inputs and outputs.
- In macroeconomics, we call the connection from inputs to outputs for the entire economy an aggregate production function.
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Components of the aggregate production function
- An aggregate production function shows what goes into producing the output for an overall economy.
- This aggregate production function has GDP per capita as its output, and shows three inputs which each influence the output.
- The function shows that output per capita (i.e. productivity) is positively related to physical capital, human capital and improvements in technology.
Measuring productivity
- An economy’s rate of productivity growth is closely linked to the growth rate of its GDP per capita, although the two are not identical. For example, if the percentage of the population who holds jobs in an economy increases, GDP per capita will increase but the productivity of individual workers may not be affected.
- Over the long term, the only way that GDP per capita can grow continually is if the productivity of the average worker rises or if there are complementary increases in capital.
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Measuring productivity
- A common measure of U.S. productivity per worker is dollar value per hour the worker contributes to the employer’s output.
- The chart above shows an index of output per hour, with 2009 as the base year (when the index equals 100). The index equaled about 106 in 2014. In 1972, the index equaled 50, which shows that workers have more than doubled their productivity since then.
Test yourself on Economic Growth & Productivity
What is a common measure of U.S. productivity per worker?
Which three inputs are positively related to GDP per capita, according to the aggregate production function?