Activity 4(e)

Activity 4e Productivity – why is it so important?

  1. Productivity is a measure of the output that is generated from a given input. It can be measured in a number of ways but one of the most common ways is to divide the total production of an economy (or individual business) by the total hours worked (this gives a measure of labour productivity). Therefore, it could be measured by real GDP per hour worked. Capital productivity could also be used which would look at total output relative to the number of capital (e.g. machine) hours used. Economists are also interested in multi-factor productivity which shows how the combination of labour and capital can influence the amount produced per hour.
  2. Productivity is a measure of efficiency and how well resources are being used to arrive at the final product. Production can be thought of as the final result of these efforts (a noun). Production can also be used to describe the process of converting resources into a final product (a verb).
  3. If productivity increases, then businesses are able to produce a greater volume of goods and services with the existing resource. This means that their ability and willingness to supply can increase and the economy’s potential output can be expanded.  Productivity growth will typically reduce unit costs for the goods and services that are produced. This occurs as a greater volume of production can be achieved from existing resources and if wages and other costs don’t increase by the same percentage then cost per unit tends to fall. This may encourage firms to pass on the savings to consumers who (responding to the law of demand) will use their income to purchase a greater volume of goods and services (the income effect).  Lower production costs and lower prices will also contribute to an increase the international competitiveness of local firms, leading to greater export sales, a movement away from imports and overall increase in the net exports component of AD.  This further helps to boost GDP and GDP per capita (living standards).
  4. If a society (or an individual business) become fixated on productivity growth, then this may have detrimental effects on non-material living standards. Stress levels at workplaces may rise as employees feel that their efforts are inadequate and that they constantly need to strive to increase their output. Workers may become tired more easily if they are working harder and this could lead to relationship issues and mental health problems.