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Knowledge Base

The Formula for Economic Growth

What is productivity?

Productivity is a measure of the efficiency of an individual, machine, factory, or even a system in converting inputs into useful outputs. For example, the productivity of a factory worker making cellphones could be measured by how many cellphones they make in an hour. The more they produce, the higher the productivity of the factory.

What’s causing productivity to slow down?

Productivity can slow down if investment into the tools, factories, equipment, or other physical capital is reduced. Lower investment in education and human capital can also lead to long-term declines in productivity.

Who are the Baby Boomers?

Baby boomer is a term referring to a person who was born between 1946 and 1964. The baby boomer generation represents nearly 20% of the American public and has a significant impact on the economy. However, due to baby boomers reaching the retirement age and fewer adults joining the workforce, economic growth has been negatively impacted.

Why do increases in productivity and total hours worked interact to inform economic growth?

In order to determine economic growth, the size of the economy must be compared to a previous time period. Increases in productivity alone are not enough to tell us if the economy has grown. If the people working get twice as productive, but total work falls in half, then there will have been zero growth. In the same way, adding more people to the economy at the expense of productivity could also lead to mixed results on economic growth.

Isn’t the size of the economy determined by consumption, investment, government purchases, and net exports?

Absolutely. But in the current situation, it is helpful to use the growth accounting framework that measures the economy in terms of inputs (labor and capital) and aggregate output.