What's Happening in the New Economy?


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Do your parents ever ask you to shovel the snow out of your driveway or mow the lawn? Have you ever thought that these jobs are a waste of your time? Perhaps you are right. If it takes you one hour to shovel snow from your driveway, you might reasonably wonder how long it might take if you had a snow-blower. If you spend two hours mowing your yard with a 21" cut walking lawn mower, how much more efficient could you be with a 48" cut garden tractor?

Imagine what life must have been like 200 years ago. The most advanced mode of overland transportation was horse and buggy. Intercontinental travel was limited to wind-powered sailing vessels. Advanced communication meant receiving an outdated letter in the mail. Employment opportunities were limited to the agricultural sector. No indoor plumbing, no electricity, no television, no automobiles, no cellular phones, no overnight business meetings 1000 miles away, and the list goes on. Living standards in the United States have expanded at a very rapid rate over the past two centuries. Economists usually use the output of goods and services per person to measure a nation's standard of living. The level of per capita (per person) U.S. output in 1990 was nine times its size 120 years earlier. In the 1990s alone, the level of output per person in the United States has expanded by several thousand dollars. Inflation adjusted per capita output is now over $28,000. What accounts for this impressive rise in our living standards? Many observers suggest that the explanation of increased prosperity can be found in the productivity improvements of the New Economy.


In this lesson you will become informed on what the New Economy is and develop a better understanding. The road to a new economy  must include certain changes to get a high-productivity, low-inflation economy. You will read about the changes that need to occur.  You will also analyze charts and tables containing statistics on information-technology and skilled labor shortages, and with the information answer questions to better your understanding and comprehension of the material. Use the resources that follow to complete activities and questions in the Process section.


What is the New Economy?

Read "The New Economy ."

What does the article suggest is the New Economy?

To an economist, technology basically means finding a better way to do things. This technology is often embodied in the physical capital that is used to produce goods and services. Physical capital refers to the machinery, equipment, and structures that people use to produce valued output. For example, a shovel, snow blower, snow plow and a lawn mower are all examples of capital goods. A company that purchases a new piece of machinery is committing current resources to invest in capital that will yield a stream of benefits in the future. If this machine allows the company to produce more output in the future with the same (or fewer) labor resources, then the investment is said to increase labor productivity.

It is perhaps easiest for you to think of productivity as output per hour. A company that is able to achieve rising output per hour will be able to compete more effectively in the global marketplace. It will also be able to reward workers by paying them higher rates of compensation. The key to the New Economy is for companies to find ways to achieve productivity gains. This allows companies to grow and it increases workers' living standards. This all happens while inflation, the increase in the average price level, is declining.

So what is the key to productivity growth? New Economy proponents claim that the answer lies in information technologies. Advanced communications technologies allow project team members to be in touch with one another, around the clock and around the globe. They can instantaneously share innovative ideas. New information technologies allow companies to move financial resources around the world at the touch of a button. Data management technologies allow firms to manage inventories like never before. Internet resources allow educators to interface with learners outside of the traditional classroom. The classroom of the future is anytime, anywhere. And the list goes on. These technologies allow us to produce more at lower unit costs. With technology, it seems, there is such a thing as a free lunch!

See "Productivity and Costs ."

  • What was the change in U.S. output per hour in 2009, Quarter 4? 
  • What was the change in U.S. compensation per hour in 20099, Quarter 4? 
  • What does this imply about unit labor costs (this is the hourly cost of workers adjusted for their productivity)?
  • How is this good for the economy?
  • How does this growth affect inflation?

Summarizing, here is the New Economy in a nutshell:

In order to be more competitive, firms invest in innovative information technologies. Over time, this allows these firms to be more productive. Since workers are now able to produce more output per hour, firms reward their workers with increased hourly compensation. If many firms are experiencing these productivity gains, then overall economic growth is observed and inflationary pressures subside. Ideas can be easily transmitted through advanced communication technologies, productivity-enhancing innovations are diffused around the world, and other countries benefit from the New Economy.

Labor Productivity Activity: Adding up Numbers

This activity helps you see how successive technological advances have led to productivity improvements at your local grocery store. You are asked to determine how much time it takes you to complete a task that involves adding up a set of 10 numbers. Your teacher will give you a sheet of paper with your numbers and the instructions to complete this exercise.

Make these calculations by hand.
1 @ 3/$0.87
(one item is purchased, the listed price is 3 items for $0.87)
Time taken to complete task:


Make these calculations with a calculator.
1 @ 3/$0.87
(one item is purchased, the listed price is 3 items for $0.87)
Time taken to complete task:


Your total is $25.16
Assume that this took you 30 seconds to complete.
  • What is the average amount of time it took each group to complete the task?
  • Which group was fastest?
  • Which group was slowest?

Each group produced the same output, but each group did it in a different average amount of time. For example, fewer labor inputs were used by Group 3 to produce an amount of output that was equal to Group 1. Stated differently, Group 3 was more productive.

Think of this activity as relating to the technological advances that have occurred at supermarkets. At one time, grocers totaled up purchases by hand, with paper and pencil. When the technological advance of the cash register (related to the adding machine and handheld calculator) came about, it simplified the task of summing up numbers. This freed up grocers to use their time doing other things. This is represented by Group 2. These days, the typical supermarket uses a bar code device to scan the prices from UPC symbols. It probably takes the typical cashier no longer than 30 seconds to total up the prices.

  • What is the difference between the average time taken by Groups 2 and 3?
  • In which groups was a mistake most likely to happen?
  • Besides adding up prices, in what other ways do you think grocers have found the new technology useful?

It is easy to see why supermarkets have invested in advanced technology. Technology has made them more productive. This has allowed stores to allocate existing workers to more valued uses, has reduced the amount of labor used by supermarkets, and has benefited consumers by improving quality, lowering prices, and reducing the amount of time spent in the store.

The Road to the New Economy:

Go to TABLE: The Road to the New Economy .

This table lists some of the important criteria for becoming a high productivity, low inflation country. One of the important critrea is strong investment in information technologies.

Go to CHART: Who's Ahead?

  • Which countries have spent the largest fraction of output on information technology?

The New Economy requires workers to be highly skilled, flexible, and geographically mobile. If you meet these requirements, the world will beat a path to your door.

Go to CHART: The Danger: Skilled Labor Shortages .

  • What areas have experienced the most rapid growth of college enrollments in the 1990s?
  • What area has the largest share of increase in global college enrollments in the 1990s?
  • Why should the slow growth of college enrollments in the Americas be a concern to U.S. policy makers?

The Federal Reserve, the central bank and monetary authority of the United States, has recently undertaken credit tightening measures with the hope of containing inflationary pressures. The U.S. economy expanded at an annual rate of 3.4 percent in the fourth quarter of 2009. Virtually everyone agrees that output growth at this rapid rate is unsustainable. In the past, such increases in output (accompanied by falling unemployment) have been thought to be an indicator of higher future inflation. Traditionalists assert that whenever the economy is growing too rapidly, the Federal Reserve must make a preemptive strike against rising inflation by putting the brakes on economic growth. New Economy thinking challenges this conventional wisdom. Instead, New Economy proponents want to see firm evidence of inflation before the Federal Reserve reacts to more rapid growth. Growth that comes from increased productivity expands the country's productive potential and does not create the inflationary pressures that have been observed in the past.


What will life be like in two-hundred years?

Even the greatest visionary in 1800 could not have imagined the tremendous expansion of living standards many people have experienced over the past 200 years. Who would have guessed that a business person could travel from New York to Seattle for a business meeting and return the next day? Who could have thought that health care professionals from the UNited States, Japan, and Sweden could collaborate on a DNA mapping project by utilizing the Internet. No one can effectively predict what the world will look like in 2200. But one thing seems certain. If people and firms continue to focus their energy on productivity-enhancing technological advance, the world will be a much better place in which to live in two hundred years.