To recap, labor productivity refers to the value of output (say dollars’ worth of cars) produced when compared to the amount of labor used to create that output. “Higher” labor productivity means that more output is produced per hour of work. To compare labor productivity over time, output values have to be adjusted for inflation. Productivity can also be compared over time by comparing output growth to the growth of all inputs, including labor and capital and possibly other inputs, such as fertilizer used in growing a crop. This is termed total factor productivity. Increases in output not “explained by” increases in input show up as higher total factor productivity and are often attributed to improvement in technology. Productivity increases show up in the marketplace as lower costs for goods and services relative to wages, at least in the aggregate, but workers are often displaced in the process. In the end society as a whole is made better off by productivity increases since there is more output per work hour, but this increase in income is not usually distributed evenly, at least in the short run, as those displaced by productivity increases may not find work that pays as well as their old jobs. As we saw in The Island thought experiment, trade can help ameliorate the employment effects of increased productivity. In the absence of trade barriers, exports and employment will go up when productivity results in lower prices^[1]. For a country as a whole, productivity is measured as “gross domestic product”, or GDP, per worker. A similar measure, GDP per person, indicates how rich a country is, on average, but of course says nothing about income distribution. One can get an idea of how countries compare economically by looking at their GDP per capita and per worker.

^[1] Prices always have to be adjusted for inflation in order to be comparable over time. We’ll look at how that is done in Part II.