Measuring Productivity

  • Productivity is the effectiveness with which factors of production are converted into output. In other word, productivity is the ratio of the output produced to the amount of input. We talk of total factor productivity when referring to the overall productivity of an economy. That is the percentage change in real GDP equal the percentage change in total factor productivity plus the percentage change in labor and capital multiplied by the share of GDP taken by labor and capital.
  • Measuring countries productivity growth.

We use growth accounting which equation show how given a country’s growth rates of output, physical capital and human capital , we can measure its growth rate of productivity.

Growth accounting

Consider our by-now familiar production function:
Applying our rules for growth rates

  • What is the economic interpretation of this equation?

The growth rate of output is the sum of TFP growth and input growth. Input growth is itself a weighted average of the growth rates of the inputs; weights are factor shares.

Measuring productivity difference among countries .

  • We use development accounting which is a technique of breaking down difference in income into the part that is accounted for difference in productivity and the part accounted for by difference in factor accumulation.
  • This expression says that, in determining the productivity difference between two countries, we look at their level of output and levels of factor accumulation. The large the ratio of output in the two countries, the larger the productivity gap we would infer. Conversely, the larger the gap in the accumulation of factors, the smaller the productivity gap we would infer.

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