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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

as the price of tickets rises from $200 to $250, what is the price elasticity of demand for business travelers, vacationers using midpoint method
Buumba Reply
$300
Jb
Explain how income taxes and transfer payments are used to stabilize the economy
Nakagwa Reply
reduce demand on scarce resources by reducing money supply.
NOEL
sketch the graph of supply curve
Isamole Reply
why is not possible accept or reject any microeconomics theory explain
Amna Reply
what is law of demand
four major factors of macro economics
saad
what is liquidity trap ?
Vibhu Reply
what is inflation?
MALEK
what type of tests can be applied to a country's budget? to test for robustness of data used.
Jerry
hi jerry i not sure of tests. i think more consideration implement n result.
OK
thanks. when we analyse a country's budget what are the issues that we are looking for that determine whether it's a sound budget or a weak or not so sound budget?
Jerry
adequate is the answer. ministries n statistics dept provides the numbers n budget tries to push the system. providingly $budget is used wisely n properly according to design.sociology is also a consideration
OK
liquidity Trap is a situation where by contractionary Monetary policy is no longer able to stimulate aggregate demand.
Umar
what criteria is applied to determine if a country's monetary policy is weak? what are the tell tale signs?
Jerry
jerry should start a new thread discussion
OK
monetary policy to stabilize exchange rate
rapheela Reply
two ways in which the central bank can use monetary policy to help stabilize the exchange rate
rapheela
that's interesting. So in my context where the PGK is struggling against the USD how do we ease the pressure? we also have a healthy current account position with so much domestic liquidity.
Jerry
One example Is Europe. with the "quantitative easing", they've made monetary base, without create inflation. and they cut the price of euro by setting it at the same price of dollars.
Omar
if a person is working for a company for k500 and a person spends the k500 to purchase meal meal 5kg at k100/kg and now due to convid 19 the price for meal meal rise to k120 /kg. the company decides to give him salary for k400 in order for him to purchase meal meal for k80/kg or the company increase his salary to k600?
Bridget Reply
it depends in which sector the person actually works. I mean, if this person works in a sector that is in totally or partially in lockdown his salary gonna be cutted. By the way not every sector are in lockdown and not every workers have seen his salary reduced.
Omar
thank you
Bridget
but can you just imagine it is like that which one can you advise if maybe that person comes to ask for advice whether to accept k400 or k600 from the company as an economist
Bridget
thank you
Bridget
suppose that perfectly competitive firm is maximizing is profit in the short run. at the profit maximizing quantity AR<ATC compared to the short run in the long run they will be
aziz
okay thanks
Bridget
The stock of high power money in an economy is₹22550.Currency deposit ratio is0. 6&the reserve ratio is 0.12.If the Central Bank purchases the Government securities worth ₹12500, what is the increase in money supply in the economy?
Amb Reply
What is liquidity
Amb
what is liquidity preference?
Ambele
the difference between GDP and GNP
Sarpong Reply
how is productivity found
Sarpong
through production
eze
why do we need to divide by 2($0.50/$2)when we already multiple by two(2).
Olaoluwapo Reply
[19/03, 5:20 p.m.] इको सर: असाइनमेंट प्रश्न: 1. आईएस-एलएम ढांचे का उपयोग करते हुए, निम्न स्थितियों में से प्रत्येक का वर्णन करें: केंद्रीय बैंक द्वारा निरंतर धन की आपूर्ति के साथ सरकारी खर्च में वृद्धि। 2. केंद्रीय बैंक द्वारा ब्याज दरों को स्थिर रखने के लिए पर्याप्त रूप से पैसे की आपूर्ति को बदलने के साथ सरकारी खर्च में वृद्धि [१ ९ / १०, ५:२४ बजे] इको सर: २। मुद्रास्फीति की परिभाषा को परिभाषित करें, यह अवधारणा मूल्य स्तर में निरंतर और लगातार वृद्धि कैसे समझाती है?
Danish Reply
what is economy
Mugisha Reply
An increase in the number of people within a specific age group without jobs but are actively looking for jobs is a major macro economic issue in any country. Please briefly explain the factors that influence a rise in this phenomenon and the effect it has on the country.
Bridget Reply
is Lm analysis
Ferdous
really
preety
theory of distribution
preety Reply
please help me
preety
theory of distribution
preety

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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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