Why Productivity Growth Matters So Much

One economic theory is that business cycles are caused, at least in part, by technology introductions and their resultant impact on productivity -- this is termed the real business cycle theory. While economists don't all agree on this theory (or others as well), one can conceptually understand how productivity growth has been correlated with episodic bouts of economic growth, or lack thereof. After all, productivity gains are what allow the economy to produce more with given inputs of labor (and capital, in some measures) and are essential to increasing living standards.

Researchers at the Chicago Fed recently documented this relationship. Beginning in 1973, low rates of productivity gains were associated with a moribund economy in the 1970s. Then, beginning in the early 1980s, productivity began to grow, modestly at first, and economic growth responded upward in turn. In the mid-1990s, productivity growth took off in tandem with the tech and Internet boom, and we had a booming economy....368 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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