Productivity and Aggregate Supply

Changes in productivity in the economy affect AGGREGATE SUPPLY.

Aggregate supply (AS) is defined as the total amount of goods and services (real output) produced and supplied by an economy’s firms over a period of time. It includes the supply of a number of types of goods and services including private consumer goods,capital goods, public and merit goods and goods for overseas markets.

The following make up AGGREGATE SUPPLY

Consumer goods

Private consumer goods and services, such as motor vehicles, computers, clothes and entertainment, are supplied by the private sector,  and consumed by households. For a developed economy, this is the single largest component of aggregate supply.

Capital goods

Capital goods, such as machinery, equipment, and plant, are supplied to other firms. These investment goods are significant in that their use adds to capacity, and increases the economy’s ability to supply private consumer goods in the future.

Public and merit goods

Goods and services produced by private firms for use by central or local government, such as education and healthcare, are also a significant component of aggregate supply.  Many private firms such as those in construction, IT and pharmaceuticals, rely on contracts to supply to the public sector.

Traded goods

Goods and services for export, such as chemicals, entertainment, and financial services are also a key component of aggregate supply.

Read on and look at the Classical, Keynesian view but also SHIFTS in the AS curve