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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

discuss the fourth pillar of wages and price stability
enlighten me please
Do we have calculation in macroeconomics
Wilberforce Reply
What will be the multiplier, when MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? And If the MPC is 0.67?
Ayesha Reply
what are the side effects of government policies
narayan Reply
Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production.
if there is a negative technology shock to the economy in short run the firms production cost will go up and labor goes down and thus consumption and production will be lower than before. the government can spend to create jobs and central Bank can lower the interest rates
what are marlet prices
Jaheim Reply
price which includes net indirect taxes
what is aggregate demand
Kalkidan Reply
what is micro economics
A-dip Reply
microscopic study...
microeconomics is study of individual, household and firms of division making and allocation of resources.
Join me in Vietnam
what a pure economics. must have downloaded by mistake.
microeconomics is the study of an individual unit in an economic system or an household
what really cause inflation?
Urey Reply
what is trade deficit
vivek Reply
is ther forgon alternative. is the amount sacrifice of one thing to gain another thing
what is enflation rate?
Mohibullah Reply
Is it inflation rate sir
This is the annual rate of increase of basic household goods and services and measures also the cost of living and doing business in a country. it's a important information when making for forecast or business plans.
this is continuous increase of overall price level
the betewen microeconomics and macroeconomics is microeconomics is concerned with individual scarcity like household,workers and so on while macroeconomics is focuced on the problème winth organisation the collaboration with others companies the profits and then the growth of the organisation
Amadou Reply
what is unemployment?
what is tax base
ekwuye Reply
The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority.
difference between voluntary and involuntary unemployment?
what is economic system
Alinda Reply
Quantity of Gasoline in millions was?
Touseef Reply
1000cubic meter
definition of phillips curve
Alok Reply

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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