Living Standards & Economic Growth A Primer

The central purpose of the New England Economic Adventure is to build understanding of why we enjoy a higher standard of living today than did generations past. The simple answer to this question is rising labor productivity. Increases in labor productivity drive increases in living standards. This primer looks at the rise in the U.S. standard of living over the past 200 years and at the factors that have made this possible — that is, at the gains we have experienced in labor productivity and how these have come about. Five topics are covered: • what economists mean when they talk about living standards, • how economists measure living standards, • the historical record of increases in U.S. living standards, • labor productivity and economic growth theory, and • the factors that have contributed to U.S. economic growth over time. Here you'll find the theoretical underpinnings of the New England Economic Adventure. Living Standards Standard of living refers to the economic well-being of people. It incorporates material comforts, ease of living, and opportunities for personal satisfaction. It is usually used in a relative context — we speak of the standard of living in country A relative to country B, for example, or standards of living today compared with standards of living 50 years ago. For economists, a good measure of living standards would be the "value of all goods and services consumed per capita" (per capita = per person). Ideally, goods and services would be defined broadly and would include not only goods and services that are purchased (such as a loaf of Wonder Bread), but also goods and services produced at home (such as a loaf of home-baked bread). Goods and services provided by the government (such as public parks and fire protection) would be included, as would the value of leisure time. The ideal measure would also include the enjoyment of environmental amenities (such as clean air and water) and good health, and it would incorporate adjustments for demographic factors, such as the differing consumption needs of children and adults. Such a comprehensive measure does not exist; so we turn to approximations. The most commonly used measure of standard of living is national output per capita , usually measured as GDP or GNP per capita.1 By either measure, this has a number of weaknesses. It does not include the value of home production, nor does it capture the quality of the environment or public health. It does include something we do not consume — investments in equipment and factories; these are not consumption goods but instead have value for us because they increase our ability to produce more, and ultimately to consume more, in the future The chart below shows U.S. GNP per capita from the mid 19th century to the present. (Two values are shown for time periods in which the measurement of GNP was changed.) The chart shows real GNP. When GNP or GDP is adjusted for price changes, it is called real GNP or real GDP. In the chart, all data have been adjusted to reflect prices as of the year 2000,download