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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

If the government decrases spending by ksh. 500 billion what is the change in output given MPC is 0.75
Gichana Reply
how can policy makers strike the balance between inflation and unemployment?
Oreva Reply
c=800 + 0.75y i=500 G=900 compute the equilibrium level of national output
Omar Reply
y=c+I+g+(X-M) y=800+.75y+500+900+0 y-.75y=2200 .25y=2200 y=2200/.25 y=8800=national level of output
Please tell me the current crr, repo rate etc
Ranjeeta Reply
cash reserve ratio is the amount that is deposit by the commercial bank in Central bank.... n repo rate is a loan interest amount
what is slr madam sahar
jo amount bank reserve rakhti hai bank mai customers k liye jese ATM mai ya bank mai rakha hota hai, wo slr hota hai
pakka sahi hai
good joke
Argentina Lose !!😭😭
SLR refers to that portion of total deposits of a commercial bank which it has to keep with itself in the form of cash reserve
What is cash crop?
Ranjeeta Reply
commeciaal crops
So jowar is not cash crop?
anything which is plant inorder to sell in the market
How demand deposits are different from savings?
can unemployment be a factor of inflation?
David Reply
yeah it has an impact on cost push inflation
microeconomics is individual firms and macroeconomics is a large as a full
kendra Reply
That's true 👍
word micro means small and tiny part. word macro means large and big part.
is unemployment another cause of inflation?
can I say unemployment can cause inflation?
no. unemployment can possibly lead to deflation
if their are no production am I correct to say inflation will occurs
one of the causes of inflation is excess demand. if there's no production there would be no demand so no inflation
if we take a look at inflation, it occur because of low production. High price chasing few goods.
So are you saying demand creates supply?
to an extent because if s9mething is demanded, it's likely to be supplied
OK am still confused, if there is unemployment low production, and employment high production, inflation high increase in price, how can production be high and we are faced with inflation? When inflation is referred to higher price chasing few goods.
if the demand is increased , what is the graphics on it?
Tadesse Reply
what is macroeconomics
Prosenjit Reply
large-scale economics, such as interest rates or the gross national national product rate of of a country
Macroeconomics: is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.
well said
hello everyone, would like to ask a favor... i need your help to answer this problem: Assume that equilibrium GDP is 400B; potential GDP is 500B, the marginal propensity to consume is 9/10, the interest rate is 8%, investment spending is P20B, the money supply is 120B, and the reserve requirement
is 1/10. By how much and in what direction should the Fed change the monetary base?
what are the factors that influence surplus budget? and its effects
Christopher Reply
what is credit creation
how monetary and fiscal policy affect money supply? on economy
Christopher Reply
what is hyperinflation
David Reply
what is stagflation
in an economy when there is both inflation & unemployment prevailing at the same time.
@david - hyperinflation is very rapid inflation; it is sometimes reckoned to set in when price increases exceed 50 percent per month. Such rapid inflation not merely makes money useless as a store of value, but seriously affects its use as a medium of exchange
@yogesh: the one you are describing is Stagflation
I was answering to Riaz's querry.
Sorry, didn't see the question
what is credit creation?
what are the factors that influencing surplus budget
may I ask master level questions on this chat?
saddiq Reply
am so confused about the concept of scarcity. can u hlp me
 · Concepts of Scarcity. Scarcity refers to the condition of insufficiency where the human beings are incapable to fulfill their wants in sufficient manner. In other words, it is a situation of fewer resources in comparison to unlimited human wants. Human wants are unlimited.
what is PPC
Production possibility curve is a curve that shows different possibilities of production of a set of two good which can be produced with the given resources
micro vs macro which is complex in your view?
the aggregate expenditure function determines a specific national equilibrium income. substantiate graphically noting the sheets where applicable
Asbel Reply
formula of economics

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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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