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Chapter 20 : Productivity and wealth creation

Objectives of the chapter
•Definitions of productivity and links to efficient use of factors.
•Explain the link between productivity and wealth creation.
•Explain how it is possible to increase the productivity of land, labour and capital.
•Evaluate the limitations (!) of increasing the productivity of factors. /
  1. Define: productivity of factors (land, labour and capital)
  2. Describe/outline:why increased productivity is so closely related to increased income
  3. Explain/distinguish/draw: PPF illustrating the effects of increasing productivity
  4. Evaluate/discuss: are we doomed to starvation as populations grow?!

We have been producing more output per unit of input for….300 years now! How have we managed to ↑SoL so much?! Productivity: quantity of output (goods and services) produced with a given Q of inputs (FoPs)…for example:

1)Labour; “…quantity of beer produced per labour hour…”

2)Capital; “…quantity of beer produced per dollar cost of machines…”

3)Land; “…quantity of beer produced per tonne of hops…”

  • PPF revisited
  • “On” the PPF and…
  • …shifts
  • Why have we managed to shift the PPFworld so much in the past 100 years?!
  • Land
  • Cheaper land (note; in terms of other factors…and also, in terms of relative abundance)
  • New oil fields…coltan deposits…etc
  • Reclaim land…drain swamps…
  • Labour
  • Improved production methods using labour more efficiently
  • Education, training, experience (human capital)
  • Capital
  • New technology
  • Increase in use of robots
  • Productivity and Wealth Creation - What is it?

- Productivity is the amount of output that can be produced with a given quantity of resources.

- If countries can improve productivity, the country will become wealthier.

- It can be displayed in a graph like the on just below.

- A shift to the right will increase both consumer and capital goods.

Productivity and wealth creation

If an economy can improve productivity the country will become wealthier. This means that the economy can produce more of both capital and consumer goods with its given level of resources. Improvements in productivity mean that a country is making better use of its resources.

Improving the productivity of land

The quality of land varies. Some is fertile and can be used to crow crops or raise cattle. Other land is arid or mountainous and is almost useless. However, measures can be used to make agricultural land more productive.

  • Fertilizers and pesticides

Fertilizers are chemicals given to plants to improve their health and appearance. Pesticides are used to kill pests.

  • Irrigation

This involves diverting water from natural sources such as rivers, lakes or streams, to land which needs more water to become more productive. In crop production it is mainly used in dry areas and in periods of rainfall shortfalls.

  • Drainage

Some areas of land are unproductive because they are flooded. Drainage can be used to make such land more productive.

Labour Productivity

Labour productivity is defined as output per worker. It can be calculated by:

Labour Productivity = Total output/No. of workers

For example, A factory producing racing cycles employed 20 workers in 2008. During the year a total of 12,000 cycles were produced.

Labour Productivity = 120,000(total output)/20(No. of workers)

= 6,000 cycles per worker and year

A better method is in fact to use labour hours, e.g. no of workers x hours worked. In the example above, if each worker is working 35 hours per week…and working 45 weeks…then you get 31,500 hours of labour. This comes to 3.8 cycles per labour hour (120,000/31,500).

How can labour productivity be improved?

If the quality of human capital can be improved there will be gains in labour productivity.

Education and training

The state can help to improve the quality of human capital by investing in the education system. This might involve providing more equipment for schools and improving the quality of teaching.

Improving the motivation of workers

If people are motivated at work they will be more productive. Motivation can be improved with the use of financial incentives, but some are not motivated by money. However, it is also possible to motivate workers using non-financial incentives.

  • Job rotation involves an employee changing tasks from time to time. If people are trained to do different jobs, their time at work may be more interesting because there is more variety. They may be less bored and therefore better motivated.
  • Team Working involves organizing workers into small groups. People often work better in teams because they can support and encourage each other. Motivation is more likely to be improved.
  • Empowerment involves giving workers the power to make decisions and solve problems. This helps to raise self-confidence, makes the job more interesting and suggests to workers that they are important.

Improving the working practices used by employees

The way labour is organized and managed can affect productivity. Working practices are the methods and systems of work that employees are expected to adopt when taking on a job. Labour productivity has been improved significantly by adopting new working practices.

  • Changing factory layout. It may be possible to change the factory layout by repositioning work stations or reorganizing the flow of production. Such changes can improve labour productivity because workers may not have to move around as much, for example.
  • Increasing labour flexibility. Labour can be more flexible if workers are trained to do different jobs and can switch at short notice.
  • Adopting lean production. Lean production involves reducing waste in production. Workers may learn a variety of new working practices when this system is adopted.

Capital and productivity

Improvements in productivity often arise because of the introduction of new technology. Advances in technology have helped improve productivity in all three sectors of the economy.

Technology in the primary sector

In agriculture, for example, the uses of machines and equipments such as tractor have helped to increase output, reduce waste and improve working conditions.

Technology in the secondary sector

New technology has featured significantly in manufacturing. Employment of complex plant and equipment has led to huge increase in productivity. For example.

  • Robots. As robots handle a lot of the repetitive work in factories, it reduced the need to employ people in jobs that were boring and demotivating.

Technology in the tertiary sector

The provision of services has tended to be more labour intensive but the use of technology is becoming more widespread. For example,

  • Health care. Technological advances in medicine and surgical techniques have improved productivity. Developments in new drugs have cured serious diseases; Surgeons can carry out surgery using lasers, viewing the operation on a screen with the use of fibre optics.