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Lesson 4

This document discusses factors that determine economic growth and productivity. It notes that while the global population has tripled since 1950, average income has increased over 4 times due to worldwide economic growth. This growth has allowed both population and prosperity to rise together. Key factors that determine a country's productivity include available resources, education and skills, technology use, and management practices. Productivity is important as it is the main driver of living standards - higher productivity allows more to be produced in less time, lowering costs and raising incomes. Technology and capital investment are major factors that boost productivity over time.

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Maurice Agbayani
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
30 views

Lesson 4

This document discusses factors that determine economic growth and productivity. It notes that while the global population has tripled since 1950, average income has increased over 4 times due to worldwide economic growth. This growth has allowed both population and prosperity to rise together. Key factors that determine a country's productivity include available resources, education and skills, technology use, and management practices. Productivity is important as it is the main driver of living standards - higher productivity allows more to be produced in less time, lowering costs and raising incomes. Technology and capital investment are major factors that boost productivity over time.

Uploaded by

Maurice Agbayani
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lesson 4

Production and Growth


How economic growth differs around the world
 Economic growth means that population growth and rising prosperity can
go together. While the global average income grew 4.4- fold, the world
population increased 3-fold, from around 2.5 billion to almost 7.5
billion today. It’s easy to miss what this means: Had the world
economy not grown, a 3- fold increase of the world population would
have meant that on average everyone in the world would now be 3-times
poorer than in 1950.
 The average income in the world would have fallen to $1,100. Before
economic growth the world was exactly this: a zero-sum game in which
more people meant less for everyone else, and if one person is better
off in a stagnating economy then that means that someone else needs to
be worse off (What economic growth makes possible is that everyone can
become better off, even when the number of people that need to be
served by the economy increases. An almost 3-fold increase of the
population multiplied by a 4.4-fold increase in average prosperity
means that the global economy has grown 13-fold since 1950.

The factors that determine a country’s productivity


1. How much economic growth differs around the world
 The level of productivity in a country, industry, or enterprise
is determined by a number of factors. These include the available
supplies of labor, land, raw materials, capital facilities, and
mechanical aids of various kinds. Included also are the education
and skills of the labor force; the level of technology; methods
of organizing production; the energy and enterprise of managers
and workers; and a range of social, psychological, and cultural
factors that underlie and condition economic attitudes and
behavior.
2. Measurement of productivity
 As a prelude to an examination of productivity trends over time,
this section considers various methods of measuring the output
and input components of productivity ratios and some of the
difficulties and limitations of the resulting estimates.
a. Output
With respect to output, ideally the numbers of units of each
category of tangible commodity or service should be counted in
successive time periods and aggregated for the firm, industry, or
total economy in terms of some indicator of relative importance,
usually price or cost per unit as of a particular period.
The unit value “weights”—price, cost, or other—must be held
constant for two or more periods being compared so that changes in
aggregate output reflect changes in physical volumes rather than in
prices. An alternative procedure that produces the same results
with ideal data is to “deflate” current values of the various items
produced by index numbers that reflect relative price changes in
order to eliminate the effects of price change.
Price deflation is usually employed to obtain estimates of real
gross product by sector and industry to be used as numerators of
productivity ratios. For tangible industrial production measures,
quantities of the various commodities are generally weighted
together by constant unit values.
b. Inputs
Labor input is relatively easy to measure if one is content to
count heads of persons engaged in production or, preferably, hours
worked. But in fact, the available hours data often relate to hours

1
Lesson 4
Production and Growth
paid for, rather than hours worked, and these tend to rise in
relation to hours at the workplace as the number of paid holidays
and leaves are increased. Official estimates generally do not
differentiate among various categories of labor.

Why Is Productivity Important in Economics?


a. Why productivity is the key determinant of a country’s standard
living
The level of productivity is the most fundamental and important
factor determining the standard of living. Raising it allows people
to get what they want faster or get more in the same amount of
time. Supply rises with productivity, which decreases real prices
and increases real wages.
b. Productivity in Economics
In economics, physical productivity is defined as the quantity of
output produced by one unit of input within one unit of time. The
standard calculation gives us output per unit of time, such as five
tons per hour of labor. An increase in physical productivity causes
a corresponding increase in the value of labor, which raises wages.
That is why employers look for education and on-the-job training.
Knowledge and experience increase the human capital of the workers
and make them more productive.
c. Impact on Wages
To see how productivity raises wages, consider the following
example. An employer offers you $45 to dig a hole in their
backyard. Suppose that you have insufficient capital goods, such as
your bare hands or a spoon. Then, it might take you nine hours to
dig the hole. Your labor is worth just $5 per hour in that case. If
you had a shovel instead, it might have taken you only three hours
to dig the hole. The market value of your labor output just rose to
$15 per hour. With a big enough excavator, you might be able to dig
it in 15 minutes and make $180 per hour. In a perfectly competitive
market, labor earns its marginal product.
d. Role of Technology
New machines, technologies, and techniques are crucial factors in
determining productivity. To take a historical example, consider
the economy of the United States in 1790. At that time, nearly 90%
of the working population were farmers. 1 By 2000, only 1.9% of the
population was employed in farming.
On a percentage basis, agriculture consumed about 60 times as
much labor in 1790. However, agricultural output is significantly
higher today than in the 18th century. That makes food prices much
lower today in real terms, and it frees up workers for other tasks.
That is the way economic growth takes place when technology raises
the productive capabilities of the people.
e. Relationship with Consumption
Growth in productive capital requires periods of under
consumption. Producers must devote less energy toward making
consumable goods so they can build and use new capital goods. For
instance, an office worker cannot create web content while setting
up a new computer. These periods of under consumption need to be
funded, which is why businesses need investment for new capital
projects. Ultimately, consumers must delay their own satisfaction
to supply funding for companies in exchange for more consumption in
the future. That is how capital investment leads to higher
productivity and future economic growth.

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