Productivity and Economic Growth

Real GDP per person is a basic indicator of living standards and has grown dramatically over the time in industrialized countries. Real GDP per person depends on two factors: average labor productivity (Y/N) and the share of the population that is employed (N/POP). The share of the population that is employed has risen steadily over the past 40 years, but is ultimately limited (and likely to decrease in coming decades). Over time, increases in output per person and hence living standards arise primarily from increases in average labor productivity.

Exploration: How do changes in labor productivity affect economic growth?

The applet above illustrates the relationship between average labor productivity, the share of the population employed, and real GDP per person. Change the average labor productivity value by clicking on the value in the Average Labor Productivity box and typing in a new value. Change the share of the population employed by dragging the Share of Population Employed slider. Click the Reset button to restore the original values.

1. Set average labor productivity to $75,000 and the share of the population employed to 0.70. What is the level of real GDP per person? If average labor productivity rises to $78,750, a 5% increase, what happens to real GDP per person?
   
   
2. Set average labor productivity to $75,000 and the share of the population employed to 0.70. If the share of the population employed rises to 72% (0.72), what happens to real GDP per person?
   
   
3. Explain why, in the long run, changes in average labor productivity are the key factor influencing real GDP per person, or average living standards.
   
   
4. Set average labor productivity to $75,000 and the share of the population employed to 70% (0.70). Over the next 30 years, as baby-boomers begin to retire in increasing numbers, the share of the population employed is likely to decrease. Let N/POP fall to .60. What happens to real output per person? What needs to happen to Y/N to keep real output per person constant or growing?
   
   
5. What factors are most important in raising average labor productivity?

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