Productivity

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Income and growth around the world
• Question:
• Why are some countries richer than others?
• Why do some countries grow quickly while others seem stuck in a
poverty trap?
• What polices may help raise growth rates and long run living
standards?

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Productivity
What is PRODUCTIVITY?
• The ability to produce goods and services.

How do we measure productivity?

• Amount of goods produced by a person in a unit of time

Why is productivity important?

• A country’s standard of living depends on its ability to produce goods
and services.

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Systems Concept

inputs outputs
transformations Customers
Land Goods
people SYSTEM and
capital services
facilities
equipment
tools O
energy I
materials
information productivity

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Productivity Improvement

Productivity Improvement (PI) is the result of

managing and intervening in transformation or
work processes.
PI will occur if:

O O O O O
I I I I I 6
Measuring Productivity

• Static: P=O/I in a given period of time (t). Useful

for benchmarking purposes.
• Dynamic: p(1)=O(1)/I(1); p(2)=O(2)/I(2); then
p(2)/p(1) yields a dimensionless index that
reflects change in productivity between periods.
((p(2)-p(1))/p(1))*100 yields the percentage
change between periods.
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Measuring Productivity (Continued)

• Partial-Factor: Uses a single “I” factor; e.g.,

output/labor-hour, sales/employee
• Multi-Factor: Uses more than one “I” factor;
e.g. output/direct costs (labor, materials, and
overhead).
• Total-Factor: Uses all “I” factors.
(Note: Total-Factor captures “trade-offs”
between input factors.)
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What Determines Productivity
• Physical capital
• Human capital
• Technological knowledge
• Natural resources
• Other determinants

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Physical Capital Per worker
• Productivity is higher when the average workers has more capital
(machines, equipment's, etc.)

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Diminishing Returns to Physical Capital
• There are Diminishing Returns to Physical Capital:
• The more physical capital per worker the higher productivity but the
increase will be relatively smaller than increase in the capital
• It also means that the higher existing level of capital, the smaller will
be increase in productivity if more capital is added

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Catch-Up Effect

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Saving and Investment
• We can boost productivity by increasing K, which requires investment.
• Since resources scarce, producing more capital requires producing
fewer consumption goods
• Reducing consumption=increase saving
• This extra saving funds the production of investment goods

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Physical Capital and Productivity

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Human Capital Per Worker

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Technological Knowledges
• Society’s understanding of the best ways to produce goods and
services.

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Natural Resources Per worker

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PRODUCTIVITY, EFFICIENCY AND EFFECTIVENESS

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TYPES OF PRODUCTIVITY INDEX

𝑇𝑜𝑡𝑎𝑙 𝑂/𝑃
(Partial Productivity measure= )
𝐼𝑛𝑑𝑖𝑣𝑖𝑢𝑠𝑎𝑙 𝐼𝑛𝑝𝑢𝑡
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Different Forms of Partial Productivity

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Total Productivity Measure (TPM)
𝑇𝑜𝑡𝑎𝑙 𝑇𝑒𝑛𝑔𝑖𝑏𝑙𝑒 𝑂𝑢𝑡𝑝𝑢𝑡
Total Productivity=
𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝐼𝑛𝑝𝑢𝑡
• 𝑇𝑜𝑡𝑎𝑙 𝑇𝑒𝑛𝑔𝑖𝑏𝑙𝑒 𝑂𝑢𝑡𝑝𝑢𝑡=value of finished goods produced + value of
partial units produced+ dividends from securities +interest + other
income
• 𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝐼𝑛𝑝𝑢𝑡= Values of (Human + Materials + Capital
+energy + other inputs) used

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Total Factor Productivity Measure (TFP)
𝑁𝑒𝑡 𝑂𝑢𝑡𝑝𝑢𝑡
• Total Factor Productivity =
𝐿𝑎𝑏𝑜𝑢𝑟+𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑝𝑢𝑡𝑠

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EXAMPLE#2

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EXAMPLE#2

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 Assignment #1
A company is manufacturing 24,000 components per
month by employing 100 workers in 8 hour shift. The
company gets additional order from government to
supply additional 6000 components. The management
decides to employ additional workers. What will be
production and productivity level when the number of
additional workers employed are:
i) 30 ii) 25 iii) 20

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Productivity Growth Rate

• Can be used to compare a process’s productivity at

a given time (P2) to the same process’ productivity
at an earlier time (P1)

P2  P1
Growth Rate 
P1

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Productivity Growth Rate
Example:
• Last week a company produced 150 units using 200 hours of labor
• This week, the same company produced 180 units using 250 hours of labor

150 units
P1   0.75 units / hour
200 hours
180 units
P2   0.72 units / hour
250 hours
P2  P1 0.72  0.75
Growth Rate    0.04
P1 0.75
or a negative 4% growth rate

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Productivity Example - An automobile manufacturer has presented the following data for the past three years in
its annual report. As a potential investor, you are interested in calculating yearly productivity and year to year
productivity gains as one of several factors in your investment analysis.

2003 2002 2001 2003 2002 2001

Labor Productivity
Unit car 2,700,000 2,400,000 2,100,000
sales
Unit Car Sales/Employee 24.1 21.2 18.3

Employees 112,000 113,000 115,000

Year-to-year Improvement 13.7% 15.8%

Total Productivity
$ Sales $49,000 $41,000 $38,000
(billions$)
Total Cost Productivity 1.26 1.24 1.19

Cost of $39,000 $33,000 $32,000 Year-to-year Improvement 1.6% 4.2%

Sales
(billions)
Which is the best measurement?

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