There are four supply factors a demand factor and an efficiency factor in explaining economic growth. (1) Supply factors: the quantity and quality of natural resources the quantity and quality of human resources the stock of capital goods and technology. (2) Demand factor: maintaining full employment. (3) Efficiency factor: productive and allocative efficiency.

In the long run a nation must expand its production capacity in order to grow (supply side). But aggregate demand must also expand (demand side) or the extra capacity will stand idle. Economic growth depends on an enhanced ability to produce and a greater willingness to buy.

The supply side of economic growth is illustrated by the outward expansion of the production possibilities curve as from AB to CD in Figure 18-1. The demand side of economic growth is shown by the movement from a point on AB to an optimal point on CD as from a to say b in the figure.

Growth rate of real GDP = 4 percent (= $31 200 - $30 000)/$30 000). GDP per capita in year 1 = $300 (= $30 000/100). GDP per capita in year 2 = $305.88 (= $31 200/102). Growth rate of GDP per capita is 1.96 percent = ($305.88 - $300)/300).

In the graph AD₁ and AS₁ intersect for 1959 at a price level of 100 and GDP of 100. The 1997 AD₂ and AS₂ intersect at a price level of 385 (an increase of 285 percent) and at a real GDP of $312 (an increase of 212 percent).

Increase in labor inputs: 33 percent; increase in labor productivity: 67 percent.

Refer to Table 18-2. Productivity increasing factors in descending order: (1) Technological advance -- the discovery of new knowledge which results in the combining of resources in more productive ways. (2) The quantity of capital. (3) Education and training. Since 1940 the proportion of those in the labor force with a high school education has doubled from 40 to 80 percent. And those with a college education have more than doubled from under 10 percent to 20 percent. (4) Economies of scale and (5) improved resource allocation. Workers have been moving out of lower productivity jobs to higher productivity jobs. Part of this is associated with the increased efficiency often derived from production in larger plants in which specialization of labor and productivity-increasing methods are possible.

Declines in labor quality; a slowing of technological process; declining investment spending as a percentage of GDP; high energy prices during the 1970s and 1980s; and lagging growth of service productivity. The main consequence of the slowdown is a slower rise in the U.S. standard of living (slower increases in real GDP per capita). Other outcomes are greater inflation and loss of competitiveness in world markets.

We are generally optimistic about a resurgence of productivity growth. The most recent productivity growth rates are higher than the averages of the slowdown years. Energy prices are stable and inflation is under control; the baby-boomers are becoming more experienced workers; a surge of innovation is occurring in computers and telecommunications; real interest rates remain low prompting purchases of capital goods; and international trade barriers are declining. All these factors may result in faster productivity growth than in the slowdown years.