Manufacturing has substantially increased American consumers’ standard of living. Strong productivity gains, rapid advances in innovation, and international competition have led to deflation in manufactured goods, caused primarily by the dramatic quality improvement in computers and a corresponding reduction in prices of electronics. Between 1995 and 2012, manufacturing prices have hardly changed as the overall price level increased by 41 percent. Inflation in manufacturing excluding computers and electronic products, however, increased 42 percent over the last 16 years.
Americans have long benefited from the trend of lower prices for computers and electronic goods as consumer budgets continued to grow. For example, prices for these goods were 92.6 percent less in 2011 than 16 years earlier, with prices declining 15 percent annually. High-tech manufacturing thus provides consumers with more goods for fewer financial resources. Because Americans can purchase their goods so cheaply, they can spend more on other items.
Massive deflation in computers and electronic manufactured goods also explains why manufacturing’s share of GDP falls over time. The value of the industry’s output is the price of manufactured goods multiplied by the physical quantity of goods manufactured. Although the physical units of all manufactured goods have increased at about the same rate as overall GDP when computers and electronic products are included, dollar prices of the goods have not kept pace with overall inflation, so mathematically, manufacturers’ share of the total economy must fall.