Productivity

What is meant by productivity?

The amount of total output produced per unit of a total input which could be labor, equipment and capital is called productivity. It is a measure of the efficiency of production. The productivity could be measured on the basis of number of hours the firm takes to produce goods, could be measured on the basis of revenue generated by an employee etc.

Discuss the relationship between productivity and economic growth.

            Economic growth is defined as the increase in the real national product or the output over time. It should mean that an ever increasing quantity of goods and services is available to meet the economy’s needs over time. Whereas, the productivity means total output produced per unit of input.

            Economic growth over time is either due to the improvement in the productivity of given inputs or it due to the quantitative increase in economy’s factor endowments or due to the combination of both these factors. For e.g.: while the economy’s total labor force increases over time its productivity may also increase. The performance of economy’s capital stock may improve while it grows over time. Whatever be the factors responsible for economic growth, it will be reflected in the upward shift of the production possibilities curve

At the national level, productivity growth raises living standards because more real income improves people’s ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. Productivity growth is important to the firm because it means that the firm can meet its growing obligations to customers, suppliers, workers, shareholders and governments’ taxes and regulation and still remain competitive or even improve its competitiveness in the market place.

            Thus, both have the positive impact in the development of the economy.

Discuss two factors, other than increase in productivity, which could cause economic growth.

            Economic growth means there is an increase in national output and national income. One of the factors that cause economic growth is increase in productivity that is the increase in aggregate demand and increase in aggregate supply.

            The other two factors that cause economic growths can be broadly classified into tangibles and intangibles.

 The tangible cause includes economy getting closer to full employment, technological advancement, capital increment etc. Intangibles include the property rights structure, which directly affects individuals’ incentives to apply the tangibles to the production of goods and services People must be motivated to put them all together without which no amount of labor, capital, and technological advances can do it alone.  

Distinguish between human and physical capital.

            Capital is any resource necessary to produce the finished goods. The differences between human and physical capital are:

Human capital refers to the investment in education, skills and experience of people in the labor force. At the beginning to work, people lack significant human capital. It is the labor required to directly contribute to the production of the goods. For e.g.: an engineer in the production of a car.

On the contrary, physical capital refers to investment in infrastructure and productive physical plants and equipments. Firms use physical capital to produce other items. It is the contribution of inanimate objects in the production of a good. For e.g.: a crane, a machine etc.

Combining workers with more human and physical capital tends to increase their as well as firm’s productivity.

Why might productivity be lower in the public than in the private sector?

The value of an average government worker's labor is not equal to that of an average private sector worker with similar education and work experience. This is because private sector workers tend to be more productive. They work for more time than that of the public sector employee. Because of which the productivity tends to be more.

Even on an hour-for-hour basis, one would expect private sector workers to be more productive due to the lack of competitive forces in government. Private sector businesses face constant pressures of competition to innovate and improve their goods and services, lest they lose business to their competitors. Government agencies, by contrast, are typically monopolies protected by law, and thus are not subject to such competitive incentives and pressures.