[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

shows how real wages and the real interest rate adjust to ensure that the economy
produces at potential GDP. Over time, new investment leads to more machines and
buildings, population growth and immigration lead to increases in the labor force,
and innovation and research and development generate technological changes that
alter what the economy produces and how it is produced.
Rising Standards of Living
Table 27.1 compares the United States in 1900 and 2000. Such a comparison reveals
an enormous boost in living standards, demonstrated not just in higher incomes
and life expectancy but also in higher levels of education, improved medical services,
and a cleaner environment. If we are interested in the economy’s ability to provide
material goods and services to its residents, then we should focus on income
per capita and how it has grown. Income per capita is total income divided by the
population. Over the twentieth century, the population of the United States grew
from 76 million to 281 million, but real GDP grew even more, raising incomes per
capita by more than 400 percent—from $6,701 to $34,935, in real terms.
Figure 27.1 shows that during the 1960s, real income per capita grew rapidly.
That growth slowed during the 1970s and 1980s, but beginning in the last half of the
1990s, its pace increased. The growth rate of income per capita (Y/N ) is equal to
the growth rate of output (Y ) minus the growth rate of the population (N ).
We can write income per capita as the product of output per hour and hours
per person:
Y/N = (Y/H ) × (H/N ).
Table 27.1
THE UNITED STATES IN 1900 AND 2000
1900 2000
Population 76 million 281 million
Life expectancy 47 years 77 years
GDP (in 2000 dollars) $510 billion $9,817 billion
GDP per capita (in 2000 dollars) $6,701 $34,935
Average hours worked each week in manufacturing 59 42
Average hourly wage in manufacturing (2000 dollars) $5.33 $14.37
Number of telephones 1.3 million >200 million
% of those age 5–19 enrolled in school 51 percent 92 percent
SOURCES: Economic Report of the President (2004); Statistical Abstract of the United States (2003).
586 ∂ CHAPTER 27 GROWTH AND PRODUCTIVITY