Question:
As an economy grows and productivity increases, real wages tend to rise - people get richer on aggregate. Real wage growth implies that people are able to purchase more of the goods that are in the basket of goods (the basket that is taken to measure inflation). So they can buy more of these goods , or presumably other more expensive goods (?)
My question is that as people earn more, in real terms, and the economy and productivity is growing (such that companies are able to continue increasing real wages) will there not come a point when people start switching over to higher priced goods , meaning that the producers of the lower priced goods go out of business and they in turn have to sack their employees- how does this affect things then? Is this what is meant when people/economists talk of economies moving to higher value added products - but how can this be sustained if people switch over to high priced goods which causes employees and companies in the lower priced goods market to go out of business?