3

Productivity, Output,
and Employment

In Chapter 2, we discussed the measurement of several economic variables Learning

used to gauge the economy’s health. The measurement of economic perfor-
mance is a prelude to the main objective of macroeconomics: to understand how
Objectives
the economy works. Understanding how the economy works requires a shift 3.1 Discuss
from economic measurement to economic analysis. production function
In Part 2 of this book, which begins with this chapter, we have two main
properties and
goals. The first is to analyze the factors that affect the longer-term performance
of the economy, including the rate of economic growth, productivity and living changes.
standards, the long-run levels of employment and unemployment, saving and 3.2 Discuss factors
capital formation, and the rate of inflation, among others.
that affect the demand
The second goal is to develop a theoretical model of the macroeconomy
that you can use to analyze the economic issues covered in this book and others for labor.
that you may encounter in the future. As outlined in Chapter 1, our model is 3.3 Discuss factors
based on the assumption that individuals, firms, and the government interact
that affect the supply
in three aggregate markets: the labor market (covered in this chapter), the
goods market (Chapter 4), and the asset market (Chapter 7). In developing and of labor.
using this model in Part 2, we generally assume that the economy is at full 3.4 Identify factors
employment, with quantities supplied and demanded being equal in the three
that affect labor
major markets. As we are focusing on the long-term behavior of the economy,
this assumption is a reasonable one. In Part 3, in which we explore business market equilibrium.
cycles, we allow for the possibility that quantities supplied and demanded 3.5 Explain how
may not be equal in the short run.
the unemployment
In this chapter, we begin the discussion of how the economy works with
what is perhaps the most fundamental determinant of economic well-being in rate is measured and
a society: the economy’s productive capacity. Everything else being equal, the describe changes in
greater the quantity of goods and services an economy can produce, the more employment status.
people will be able to consume in the present and the more they will be able to
save and invest for the future. 3.6 Explain the
In the first section of the chapter, we show that the amount of output an significance of Okun’s
economy produces depends on two factors: (1) the quantities of inputs (such as law.
labor, capital, and raw materials) utilized in the production process and (2) the
productivity of the inputs—that is, the effectiveness with which they are used.
As discussed in Chapter 1, an economy’s productivity is basic to determining
living standards. In this chapter, we show how productivity affects people’s
incomes by helping to determine how many workers are employed and how
much they receive in wages.
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