Why is productivity growth the main route for increasing society's standard of living?

• First of all, economic growth can be defined as increase in real income or wages.
• An economy grows when there's increase in productivity, meaning greater output per hour
• Great output brings in greater revenue and transfers into people's income/wages
• When there's an increase in real income, brought by productivity, larger than the increase in population, real GDP/capita increases

What is the "New Economy"?

• New Economy is what economist termed America's economy to be in the 90s because of their rising productivity growth due to newer technologies, namely the internet.
• New Economy also represents a greater potential economic growth, one with a higher projected trend rate of productivity growth.

What are the characteristics of the new economy?

• New Firms and Increasing Returns:
• Hundreds of new start-up firms advanced various aspects of the new information technology. Many of these firms were more 'hype' than goods and services and quickly fell by the wayside. But some flourished; Intel (microchips), Apple and Dell (personal computers), Microsoft and Oracle (computer software), Cisco Systems (Internet switching systems), America Online (Internet service provision), Yahoo and Google (Internet search engines), and eBay and Amazon.com (electronic commerce).
  
• Microchip and Information technology: The center of the New Economy is a fast increase in entrepreneurship and innovation based on the microchip. Information technology was been used to connect all parts of the world.
• the core element of the productivity speed up is the innovation based on the microprocessor, or microchip. It also of automobile, air travel, the telephone, and tv.
• Increasing returns to scale: When a firm's output increases by a larger percentage that its increase in inputs.
  • Also known as economies of scale
  • Increase in efficiency is caused by:
    • More specialized inputs, such as experts, management system, and capitals.
    • ex. accountants, marketing managers, and system maintenance experts.
      
    • Spreading of development costs. When productivity rises, more products can be produced from an amount of raw materials, thus the per unit cost decreases as quantity produced increases
    • Simultaneous consumption, and it explains how products like Microsoft Office or a DVD can be reused or used at the same time
    • Networke ffects, which integrate the use of one technology, and improving communication and teamwork when people use similar technology
    • Learning by doing because there is easy communication, people are enabled to improve capitals that benefit every common user
    • Increased returns to scale by more productive workers also creates new potential markets, thus increasing the capacity for the economy to grow.
• Global competition: Increased global competition is largely due to information technology
  • As a result of global competition, firms mustlower their prices and costs to stay competitive, and there's price stability
  • Other contributions of global comeptition
    • Less trade protection from domestic government
    • Increase of free-trade zones, such as NAFTA and European Union
    • Trade liberalization through the World Trade Organization
• Faster noninflationary growth: the New Economy has a higher "safe speed limit."
  • Meaning people can consume more without fear of inflation
  • Why?
    • Good times in the economy cause aggregate demand to increase, which will results in demand-pull inflation
    • Remember that when aggregate supply shifts rightward due to changes in one of the four determinants of supply, price level decreases when output increases
    • So when productivity and aggregate supply increases at a faster rate than aggregate demand, the economy withstands economic growth and slower inflation growth
• Low NRU: there is lower frictional and structural unemployment
  • Employers and workers are able to find each other more quickly through the Internet
  • Technology allows retraining of workers in various skills, thus workers are adaptable to changes in the labor market
• Growing Tax revenues: economic growth yields increase in income, and an increased portion is paid in taxes to the government
  • This allows the government to move towards a surplus and pay off its deficits.

Proponents of the idea of a New Economy emphasize that it does not mean that the business cycle is dead, but instead the trend lines of productivity growth and economics growth are steeper than they were in the last two decades.