Understanding Economic Equilibrium

CHAPTER 27

Productivity and Wages: What We Make for What We Earn

We get economic growth either by adding more workers to the labor force to make more goods and services or by making workers more productive. Both increase the size of the economic pie. When you add more workers, you have to divide the bigger pie by a bigger number of workers, but when everyone is more productive, everyone can, theoretically, get a bigger slice.

By extension, we talk about growing GDP as a means to improve our standard of living. But what matters in terms of a standard of living is not the size of GDP, but GDP per capita, which is a function of productivity. China’s GDP is on pace to surpass that of the United States—in terms of purchasing power parity, China’s ...