Economic Growth vs Productivity
Economic Growth and Productivity are two Economic Growth concepts in AP Economics that students often mix up. Economic growth is a sustained increase in an economy's real output, usually measured as the rise in real GDP or real GDP per capita. Productivity is the amount of output produced per unit of input, most often output per worker or per hour worked. Here is how they compare side by side.
It is shown by an outward shift of the production possibilities curve or a rightward shift of long-run aggregate supply. Sources include more capital, labor, and natural resources, plus better technology and productivity. Per-capita growth is the main driver of rising living standards.
Rising productivity is the main long-run source of economic growth and higher living standards. It increases from better technology, more capital per worker, and improved human capital. Higher productivity shifts long-run aggregate supply to the right.
Economic Growth vs Productivity: Total Output and Output Per Hour
| Economic Growth | Productivity | |
|---|---|---|
| What is measured | The rise in an economy's total real output | Output per unit of input, usually per hour worked |
| Usual units | A percentage change in real GDP | A level, such as output per hour, and its growth rate |
| Effect of adding workers | Raises it, since total output goes up | Leaves it flat, or lowers it if the new workers have less capital to use |
| What raises it over decades | Population, capital, human capital and technology | Capital per worker, skills and technology, but not headcount |
| Link to living standards | Indirect, since a larger population can raise output with no gain per person | Direct, since real wages track output per hour over long periods |
| Where it appears in a model | An outward shift of the production possibilities curve | Output per worker read off the aggregate production function |
One growth figure hides three different stories
Illustrative arithmetic keeps the two straight. Suppose real output grows 3.0 percent over a year while total hours worked grow 1.0 percent. Output per hour then grew about 2.0 percent, since 3.0 minus 1.0 is 2.0. Suppose population grew 1.5 percent over the same year. Real output per person grew about 1.5 percent, since 3.0 minus 1.5 is 1.5. A single headline number has now produced three true statements: the economy grew 3 percent, the average person became about 1.5 percent better off, and each hour of work produced about 2 percent more. They answer different questions, and picking the wrong one is how arguments about whether a country is doing well go wrong. A country with fast population growth can post strong output growth while the typical person gains almost nothing, which is the standard case in development economics. A country with a shrinking workforce can post weak output growth while everyone still working becomes steadily more productive, which is the standard case in an aging economy. The per-hour calculation is worked at /calculate/labor-productivity.
Over a long horizon only one of the two settles living standards
Add more workers and total output rises, but nothing makes output per person rise with it. Add more capital per worker, better training or better technology and output per hour rises, and that is the increase that can be paid out as higher real wages without pushing up prices. That is why productivity growth is the number to watch when the question is how well people live rather than how large the economy is. Compounding finishes the argument. At 2 percent a year, output per hour doubles in roughly 35 years, so a single working life sees living standards double. At 1 percent it takes about 70 years, so the same gain takes two generations. One percentage point separates those outcomes, which is why an argument that sounds dry, whether productivity growth has slowed, is among the more consequential arguments in economics. The catch is that productivity growth eventually requires new ideas rather than more machines, since piling capital onto a fixed workforce runs into diminishing returns and each additional machine adds less than the last. The relationship between an economy's inputs and its output is set out at /glossary/aggregate-production-function.
Frequently asked questions
What is the difference between economic growth and productivity?
Economic growth is the increase in an economy's total real output, while productivity is output per unit of input, usually per hour worked. An economy can grow simply by adding workers or hours without becoming any more productive, and that distinction determines whether the average person is better off.
Can an economy grow without productivity growth?
Yes, and many do for long stretches. Adding workers, hours or capital raises total output whether or not each hour becomes more effective, but growth of that kind runs into limits, since population and hours cannot rise forever and extra capital eventually delivers diminishing returns.
Why does productivity matter more than growth for wages?
Because a firm can afford to pay more per hour only if each hour produces more, and over long periods real wages across an economy track output per hour closely. Total output can rise with a larger workforce while the amount produced per hour stands still, and in that case there is nothing extra to pay out.
Live Production Possibilities graph. Drag the curves, or open the full version.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated