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By the end of this section, you will be able to:

  • Identify the role of labor productivity in promoting economic growth
  • Analyze the sources of economic growth using the aggregate production function
  • Measure an economy’s rate of productivity growth
  • Evaluate the power of sustained growth

Sustained long-term economic growth comes from increases in worker productivity, which essentially means how well we do things. In other words, how efficient is your nation with its time and workers? Labor productivity is the value that each employed person creates per unit of his or her input. The easiest way to comprehend labor productivity is to imagine a Canadian worker who can make 10 loaves of bread in an hour versus a U.S. worker who in the same hour can make only two loaves of bread. In this fictional example, the Canadians are more productive. Being more productive essentially means you can do more in the same amount of time. This in turn frees up resources to be used elsewhere.

What determines how productive workers are? The answer is pretty intuitive. The first determinant of labor productivity is human capital. Human capital is the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses. Typically the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity.

The second factor that determines labor productivity is technological change. Technological change is a combination of invention    —advances in knowledge—and innovation    , which is putting that advance to use in a new product or service. For example, the transistor was invented in 1947. It allowed us to miniaturize the footprint of electronic devices and use less power than the tube technology that came before it. Innovations since then have produced smaller and better transistors that that are ubiquitous in products as varied as smart-phones, computers, and escalators. The development of the transistor has allowed workers to be anywhere with smaller devices. These devices can be used to communicate with other workers, measure product quality or do any other task in less time, improving worker productivity.

The third factor that determines labor productivity is economies of scale. Recall that economies of scale are the cost advantages that industries obtain due to size. (Read more about economies of scale in Cost and Industry Structure .) Consider again the case of the fictional Canadian worker who could produce 10 loaves of bread in an hour. If this difference in productivity was due only to economies of scale, it could be that Canadian workers had access to a large industrial-size oven while the U.S. worker was using a standard residential size oven.

Now that we have explored the determinants of worker productivity, let’s turn to how economists measure economic growth and productivity.

Sources of economic growth: the aggregate production function

To analyze the sources of economic growth, it is useful to think about a production function    , which is the process of turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers. A microeconomic production function describes the inputs and outputs of a firm, or perhaps an industry. In macroeconomics, the connection from inputs to outputs for the entire economy is called an aggregate production function    .

Questions & Answers

What is elasticity of demand?
Mbye Reply
increase and decrease variation in supply due to market conditions is known as elasticity of demand.
Usama
wow
Junior
What is choice
Jnr Reply
A rise in the depoable income of consumers
Zainb Reply
Monopoly is not harmful.discus
Shaibu Reply
advantage of Fiat money over commodity money
Huruma Reply
is net exports always an autonomous expenditure
Adu
what is elasticity
Osei Reply
explain
sultan
yes
suraj
the ability of an object or material to resume its normal shape after being stretched or compressed; stretchiness.
Usama
What is choice
Jnr
what is structural inflation please help
Reliance Reply
in the structural inflation, some branches of demand got increased and other got fall. same act is happening in supply.
Usama
thanks a lot
Reliance
Hi am new can u please introduce how u guys answer de questions to me
Agnes Reply
u can post your questions. if I'm able too solve I will help you out.
Saurabh
Ok tanks
Agnes
hi
suraj
hello peeps
TASK
what is commodity?
chinemerem Reply
anyone with economics paper 1?
Sereena
a commodity is an economic goods or services
Tessa
what is pure Monopoly?
Amit
consider Apple company or microsoft. I guess that's the company with pure monopoly. because at his level he is not having a single competitor. I don't know the definition of pure monopoly. U can google it.
Saurabh
I'm not sure about microsoft but apple is.
Saurabh
another example of monopoly will be intel and amd like these 2 make processors for computers
MUKUL
what is confidential documents
Ibrahim
such documents which have secret information is known as confidential documents.
Usama
a kind of raw material, semi finish goods or finish goods that can be bought or sold is known as comodity
Usama
Examples of fixed and variable inputs
Esther Reply
Waht is the basic pirnciple of eco
Bertu Reply
scarcity, efficiency, and sovereignty.
Abuba
scarcity
Ayush
SES: scarcity, efficiency, sovereignty
TASK
okay
Jnr
due to uncertainties about the future amidst covid19, suppose consumers reduce their consumption expenditure. in Keynesian cross , explain what this change would translate into terms of production employment and income
nayanja Reply
kk
Kwaku
what is the most profitable business in any country
Amin Reply
what is Marginal analysis in Economics can sameone explain to me pliss
Gary Reply
facts and proof
Jibril
what matters in comsumption
Jibril
money speaks sales
Jibril
if marginal utility is coins then it analysis is choice of preference
Jibril
facts
Skills
what is money
Emmanuel Reply
hy
Usama
Money refers to the exchange value of goods and services.
Mbye
can you more explain it?
Usama
money is defined as any legal tender use in the exchange of goods and services.
Emmanuel
we can say commodity. A tool of change..
Baki
Money is a tool which is use to fullfil our needs and desires in the shape of goods and services.
Usama
good definition.
Baki
how does indirect tax increase the total expenditure?
Madishez
Money is any things which generally accepted as a medium of exchange by the general pubblic.
shakeel
indirect tax also the part of indirect expense. when tax occure then expenses increase
Usama

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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