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Productivity is an average measure of the efficiency of production. It can be expressed as the ratio of output to inputs used in the production process, i.e. output per unit of input. When all outputs and inputs are included in the productivity measure it is called total productivity. Outputs and inputs are defined in the total productivity measure as their economic values. The value of outputs minus the value of inputs is a measure of the income generated in a production process. It is a measure of total efficiency of a production process and as such the objective to be maximized in production process.
Productivity measures that use one or more inputs or factors, but not all factors, are called partial productivities. A common example in economics is labor productivity, usually expressed as output per hour. At the company level, typical partial productivity measures are such things as worker hours, materials or energy per unit of production.
In macroeconomics the approach is different. In macroeconomics one wants to examine an entity of many production processes and the output is obtained by summing up the value-added created in the single processes. This is done in order to avoid the double accounting of intermediate inputs. Value-added is obtained by subtracting the intermediate inputs from the outputs. The most well-known and used measure of value-added is the GDP (Gross Domestic Product). It is widely used as a measure of the economic growth of nations and industries. GDP is the income available for paying capital costs, labor compensation, taxes and profits.
For a single input this means the ratio of output (value-added) to input. When multiple inputs are considered, such as labor and capital the measure is called in macroeconomics Total Factor Productivity TFP or Multi Factor Productivity MFP.
Productivity is a crucial factor in production performance of firms and nations. Increasing national productivity can raise 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. Productivity growth also helps businesses to be more profitable.
Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of commodities and increasing incomes from growing and more efficient market production.
- Real output / Real input.
- Real income (abs.) = Real output – Real input
- productivity and production volume increase or
- productivity and production volume decrease
- productivity decreases and volume increases or
- productivity increases and volume decreases.
- Maximizing the real income
- Maximizing the producer income
- Maximizing the owner income.
- labour productivity = volume measure of output / measure of labor input use
- change of MFP = change of output (1.119)
- minus change of labour input x cost share of labour (1.150 x 0.475 = 0.546)
- minus change of capital input x cost share of capital (1.030 x 0.525 = 0.541)
- to the workforce through better wages and conditions;
- to shareholders and superannuation funds 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 (which can be used to fund social and environmental programs).
- bring additional inputs into production; or
- increase productivity.
Investment is in physical capital — machinery, equipment and buildings. The more capital workers have at their disposal, generally the better they are able to do their jobs, producing more and better quality output.
Innovation is the successful exploitation of new ideas. New ideas can take the form of new technologies, new products or new corporate structures and ways of working. Such innovations can boost productivity, for example as better equipment works faster and more efficiently, or better organisation increases motivation at work.
Skills are defined as the quantity and quality of labour of different types available in an economy. Skills complement physical capital, and are needed to take advantage of investment in new technologies and organisational structures.
Enterprise is defined as the seizing of new business opportunities by both start-ups and existing firms. New enterprises compete with existing firms by new ideas and technologies increasing competition. Entrepreneurs are able to combine factors of production and new technologies forcing existing firms to adapt or exit the market.
Competition improves productivity by creating incentives to innovate and ensures that resources are allocated to the most efficient firms. It also forces existing firms to organise work more effectively through imitations of organisational structures and technology.
- the available technology or know-how for converting resources into outputs desired in an economy; and
- the way in which resources are organized in firms and industries to produce goods and services.
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