Economic Growth, Productivity & Policy

Economic Growth, Productivity & Policy
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  • 0:01 Economic Growth Is Good
  • 1:04 Economic Productivity
  • 2:15 Monetary & Fiscal Policy
  • 3:48 Inflation
  • 4:32 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

This lesson explains the concepts of economic growth, productivity, and policy. It also shows how companies can impact each other's growth and productivity, and how both monetary and fiscal policy affects the economy as a whole.

Economic Growth Is Good

Let's say that you owned a company that offered casseroles to busy people. Unfortunately, the area you live in has a number of people who have more time on their hands than others, so they really don't use your service that much. However, that all changes when a new employer comes to town. Suddenly, many people are lining up to purchase your meals because since they are now working, they would rather pay you to cook for them than spend time doing it themselves. Your casserole company has just found itself on the right side of economic growth.

Economic growth means that the economy is moving towards its full potential output. Full potential output is a good thing for an economy, as it means people are working, and when people work, they produce things. Those things are sold, which in turn moves the economy along even more by creating more jobs. And so on the cycle continues. In your case, the economic growth caused by the new employer directly increased your ability to sell casseroles.

Economic Productivity

But, what happens when everyone is already working as hard as they can? Can an economy still grow? Of course! Let's say that your casserole stand could only produce 20 casseroles an hour. Suddenly you buy another oven and your productivity goes up to 35 an hour, all of which you can still sell. What you have just seen is a rise in the economic productivity of your business. Economic productivity refers to the amount of total products that can be made for a given set of inputs. Because your labor stayed the same, your productivity increased. In fact, you bumped up the economy productivity of the whole community, if only slightly.

While economic productivity does not spiral as quickly as economic growth, it still does have a ripple effect. Now that you can produce more casseroles, you can make more customers more productive, since now more people are spending an hour doing anything other than cooking dinner. If you were a larger company, the effect would have even been greater. All the while, this increase in economic productivity also causes an increase in economic growth.

Monetary and Fiscal Policy

Needless to say, economic growth is subject to a great deal of encouragement by governments. But, how can a government really encourage a whole economy? Luckily for governments, two sets of tools exist to help them manage the growth of the economy: monetary policy and fiscal policy.

Monetary policy refers to those policies that affect the supply of money in a given economy taken by a central bank. In the United States, the central bank is known as the Federal Reserve. As a general rule, the more money that is in an economy, the faster the economy will grow. By working with banks through adjustments to both regulations on banks and the rates that determine banks' interest rates, the Federal Reserve is able to have a sizeable impact on the movement of money through the economy.

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