Understanding the Economy

While I’m not an economist by training, I’ve grown fond of contemplating and simplifying complex economic concepts so as they make sense to me.

As I consider how to understand the scale of our economy (or of any economy, for that matter), I’ve realized that the answer is the product of three simple variables:

1. working-age population: the number of people in the country of working age (e.g., 200 million)
2. labor participation rate: the percentage of (1) above who are employed (e.g., 60%)
3. labor productivity: total value of goods and services produced per employee (e.g., $175,000)

We can then simply find the product of these three variables to understand the size of an economy:

Size of economy = working-age population X labor participation rate X labor productivity

More importantly, the way we grow our economy is to increase one or more of those variables: increase our working-age population, increase the percentage of our population that works, and/or increase our productivity/output per person.

This also allows me to analyze the real state of our economy vs. what the stock markets are indicating or foreshadowing. I’ll therefore leave the reader with that question: how have these three variables changed over the last year and how will they likely change over the next year?