Production is the act of creating output, which is a good or service that has value and contributes to the utility of individuals. Productivity is the ratio of what is produced to what is required to produce it. In other words, productivity is a measure of production efficiency, and its level has major results on overall economic performance. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments.
The performance of production measures production’s ability to generate income. There are two components in income growth due to performance: the income growth caused by an increase in production volume and the income growth caused by an increase in productivity. The income growth caused by increased production volume is determined by moving along the production function graph. The income growth corresponding to a shift of the production function is generated by the increase in productivity. The change of real income signifies a move from Point 1 to Point 2 on the production function (Figure 1). When we want to maximize the production performance, we have to maximize the income generated by the production function.
With the help of productivity models, it is possible to calculate the performance of the production process. The starting point is a profitability calculation, using surplus value as a criterion of profitability. The surplus value calculation is the only valid measure for understanding the connection between profitability and productivity. A valid measurement of total productivity necessitates considering all production inputs, and the surplus value calculation is the only calculation to conform to that requirement (Figure 2).
The results of the above model are easily interpreted and understood. We see that the real income has increased by 58.12 units, of which 41.12 units came from the increase of productivity growth. The other 17.00 units came from the production volume growth. Based on these changes in productivity and production volume values, we can explicitly locate the production on the production.
There are two parts of the production function. The first is called "increasing returns" and occurs when productivity and production volume increase or when productivity and production volume decrease. The second, "diminishing returns", occurs when productivity decreases and volume increases or when productivity increases and volume decreases.
In the above example, the combination of volume growth (+17.00) and productivity growth (+41.12) reports explicitly that the production is classified as “increasing returns” on the production function. This model demonstration reveals the fundamental character of total productivity. Total productivity is that part of real income change which is caused by the shift of the production function. Accordingly, any productivity measure is valid only when it indicates this kind of income change correctly.
In order to measure the productivity of a nation or an industry, it is necessary to operationalize the same concept of productivity as in a production unit or a company. However, the object of modelling is substantially wider and the information more aggregate. There are different measures of national productivity, and the choice between them depends on the purpose of the productivity measurement and/or data availability.
One of the most widely used measures of productivity is Gross Domestic Product (GDP) per hour worked. Another productivity measure is known as multi-factor productivity (MFP). It measures the residual growth that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is often interpreted as the contribution to economic growth made by factors such as technical and organizational innovation.
Labor productivity is a revealing indicator of several economic factors, as it offers a dynamic measure of economic growth, competitiveness, and living standards within an economy. Labor productivity is equal to the ratio between a volume measure of output (gross domestic product or gross value added) and a measure of input use (the total number of hours worked or total employment). The volume measure of output reflects the goods and services produced by the workforce. The measure of input use reflects the time, effort, and skills of the workforce.
Drivers Of Productivity Growth
Certain factors are critical for determining productivity growth. These include:
- Investment: The more capital workers have at their disposal, generally the better they are able to do their jobs.
- Innovation: For example, better equipment works faster and more efficiently, or better organization increases motivation at work.
- Skills: These are needed to take advantage of investment in new technologies and organisational structures.
- Enterprise: This is the seizing of new business opportunities by both start-ups and existing firms.
- Competition: Improves productivity by creating incentives to innovate and ensures that resources are allocated to the most efficient firms.
Importance Of Productivity Growth
Productivity growth is a crucial source of growth in living standards. Productivity growth means more value is added in production, and this means more income is available to be distributed. At a firm or industry level, the benefits of productivity growth can be distributed in a number of different ways:
- to the workforce through better wages and conditions;
- to shareholders through increased profits and dividend distributions;
- to customers through lower prices;
- to the environment through more stringent environmental protection; and
- to governments through increases in tax payments.
At the national level, productivity growth raises living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. Over long periods of time, small differences in rates of productivity growth compound -- like interest in a bank account -- and can make an enormous difference to a society's prosperity. Nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance education, public health, environment and the arts.