March 13th, 2021
“Productivity is being able to do things that you were never able to do before.”
Franz Kafka, writer
Productivity is one of the most essential determinants of economic growth. The Former President of America, Obama stated, “Without a faster-growing economy, we will not be able to generate the wage gains people want, regardless of how we divide up the pie.” Former President Obama was correct: Productivity is the key driver of economic growth. In reality, productivity could indeed explain more than 60% of cross-country income differences. Lets get deeper into this and understand what exactly is Economic Growth and How productivity drives nations economic growth with the help of two charts.
Economic growth is usually calculated by a rise in GDP, which is described as the total value of all goods as well as services produced in a country in a given year. Economic growth is influenced by a variety of factors. Even so, no single factor consistently stimulates the perfect or ideal amount of growth required for an economic system. Unfortunately, recessions are unavoidable and it can be triggered by exogenous factors including such geopolitical as well as geo-financial events.
Productivity and Economic Growth
Increases in output per worker, that also essentially means well how we perform things, drive long-term economic growth. In other words, how effectively does a country use its labour force and other assets? Labor productivity is the measure of output produced by each employee per unit of time worked.
Physical capital, human capital, as well as technological change are the primary determinants of labour productivity. These are also crucial aspects of economic growth.
Physical capital can be assumed as the techniques with which workers must work. Physical capital, more formally, includes not only the tools and machinery used by businesses, but also infrastructural facilities, such as roads as well as other components of transport systems that support the economy. Physical capital can have two effects on productivity:
- The increase in the physical capital’s quantity
- The increase in the physical capital’s quality
Human capital is indeed the accumulated knowledge that comes from education as well as experience, the abilities, and expertise of an economy’s average worker. Generally, the higher an economy’s average education level, the greater its accumulated human capital as well as labour productivity. Human capital as well as physical capital accumulation are related in that investment now pays off in future longer-term production efficiency.
Technology is yet another factor that influences labour productivity. Technological change is the result of a combination of discovery in knowledge as well as innovation, which is the application of that advance in new products and services. In a nutshell, technology encompasses all advancements that enable existing machines as well as other inputs to generate more and at greater quality, as well as entirely new products.
Productivity is the most important determinant of economic growth as well as competitiveness. The ability of a country to enhance its living standard is now almost entirely dependent on the ability to increase output per worker (i.e., producing more products and services for a given amount of working hours).
Productivity improvements allow businesses to increase production for the same amount of input, earn more revenue, and eventually boost more GDP. Here we are showing 2 charts that show productivity drives any country’s economic growth.
Productivity Per Hour Worked
This graph depicts global labour productivity per hour. When you switch to the map view, you can see the vast differences among countries. Gross domestic product (GDP) per hour of work is used to determine labour productivity per hour. GDP can be calculated in constant 2011 international dollars, which means it really is adjusted for price differences among countries (PPP adjustment) and inflation to allow for cross-country and time-series comparisons.
With an increase in labour productivity with only a small increase in working hours, an economy is able to produce as well as consume increasingly more goods and services for the same amount of work. This proves that productivity drives any country’s economic growth.
The growth rate of real GDP per employed person
This graph depicts GDP per employed person. The annual percentage change in real Gross Domestic Product per employed person is expressed by the annual growth rate of real GDP per employed person. Diversification, technical upgrading, as well as innovation, as well as an emphasis on high-value-added and labor-intensive sectors, will help to boost economic productivity.
When you switch to the digital map, you can see the vast differences among countries. Change in real gross domestic product (GDP) per employed person on an annual basis. Price changes and inflation are factored into real GDP. This proves that productivity drives any country’s economic growth.
Productivity is by far the most important driver of economic growth as well as, by extension, the standard of living. As Paul Krugman, a Nobel Laureate in economics, once said, “Productivity is not all about, and it’s almost everything in the long term.” The challenge for organizations is to think about the long run as well as recognise the market frictions that cause most businesses to slow down.
By Max Roser | All visualizations are published under the Creative Commons BY license.
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