Chapter 8 Productivity and Growth 233
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CONCLUSION
Productivity and growth depend on the supply and quality of resources, the level of technology, and
the rules of the game that nurture production and exchange. We should distinguish between an
economy’s standard of living, as measured by output per capita, and improvements in that standard
of living, as measured by the growth in output per capita. In the long run, productivity growth and
the growth in workers relative to the growth in population will determine whether or not the United
States continues to enjoy one of the world’s highest standard of living.
CHAPTER SUMMARY
If the population is continually increasing, an economy must produce more goods and services
simply to maintain its standard of living, as measured by output per capita. If output grows faster
than the population, the standard of living rises.
An economy’s standard of living grows over the long run because of (a) increases in the amount and
quality of resources, especially labor and capital; (b) better technology; and (c) improvements in the
rules of the game that facilitate production and exchange, such as tax laws, property rights, patent
laws, the legal system, and customs of the market.
The per-worker production function shows the relationship between the amount of capital per worker
in the economy and the output per worker. As capital per worker increases, so does output per
worker, but at a decreasing rate. Technological change and improvements in the rules of the game
shift the per-worker production function upward, so more is produced for each ratio of capital per
worker.
Since 1870, U.S. labor productivity growth has averaged 2.1 percent per year. The quality of labor
and capital is much more important than the quantity of these resources. Labor productivity growth
slowed between 1974 and 1982, in part because of spikes in energy prices and implementation of
costly but necessary environmental and workplace regulations. Since 1983 productivity growth has
picked up, especially since 1996, due primarily to information technology.
Among the seven major industrial market economies, the United States has experienced the third
highest growth rate in real GDP per capita over the last quarter of a century and most recently
produced the highest real GDP per capita.
Technological change sometimes costs jobs and imposes hardships in the short run, as workers
scramble to adapt to a changing world. Over time, however, most displaced workers find other jobs,
sometimes in new industries created by technological change. There is no evidence that, in the long
run, technological change increases unemployment in the economy.
Some governments use industrial policy in an effort to nurture the industries and technologies of the
future, giving domestic industries an advantage over foreign competitors. But critics are wary of the
government’s ability to pick the winning technologies.
Convergence is a theory predicting that the standard of living around the world will grow more alike,
as poorer countries catch up with richer ones. Some Asian countries that had been poor are catching
up with the leaders, but many poor countries around the world have failed to close the gap.