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Economic growth, productivity and living standards

4 important questions on Economic growth, productivity and living standards

The power of compound interest is that:

Even at relatively low rates of interest, a small sum, compounded over a long enough period, can greatly increase in value. Economic growth rates are similar to compound interest rates. Over the long run, the rate of economic growth is an extremely important variable. Hence, government policy and other factors that affect the long-term growth rate even by a small amount will have a major economic impact.

We express real GDP as the product of two terms:

Average labour productivity and the share of the population that is working. Real GDP per person can grow only to the extent that there is growth in worker productivity and/or the fraction of the population that is employed. Increases in output per person primarily arise from increases in average labour productivity.

Rather than thinking of A as a measure of technical progress only, we can think of it as the contribution to the growth in total output made by factors other that the inputs capital and labour. When viewed in this way, A is often referred to as:

Total factor productivity (TFP), because it is the amount by which output would increase even if the quantities of capital and labour are constant.

Different costs of economic growth are:

The costs of creating new capital. High rates of investment in new capital require people to consume less and save more.
Costs of research and development (R&D) -> scarcity principle