Accounting for Growth

Measuring the sources of per capita economic growth at the state level

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What matters for economic welfare is per capita income. This is a general measure of welfare, telling us how much per person is available to be consumed, invested, or put to some other use.

If we want to increase economic welfare, we should pursue policies that increase per capita incomes. A doubling of total Gross Domestic Product (GDP), if it is matched by a doubling of the population, will leave the average member of the population no better off.

Per capita economic growth comes from three sources. These are an increase in the amount and quality of labor provided by a given population; growth of capital per worker (the tools those workers have to work with); and Total Factor Productivity (“The effectiveness with which factors of production are converted into output”), which is also known as Technology (“the way inputs to the production process are transformed into output”).

These three sources can be labeled “human capital” (H), “physical capital” (K), and “Total Factor Productivity” (TFP).

Determining how a country or state is performing with regard to these sources is vital for identifying policies that will boost real per capita GDP growth. Policies that increase employment or skills raise human capital; policies that stimulate increased capital investment elevate the amount of physical capital; and policies that spur increased innovation and entrepreneurship catalyze TFP growth.

In this report, we use a technique called “growth accounting” to break down the observed rate of change in real per capita GDP in the fifty states from 2008 to 2023 into the shares derived from changes in human capital, physical capital, or TFP.

A full copy of the report can be viewed here.