Posted on: July 5, 2023 Posted by: Kshytiz Bhatnagar Comments: 0

Public knowledge is openly available and can be used by all firms (e.g., computers). In contrast, proprietary knowledge is a secret and only known to the company that discovers it (e.g., Coca-Cola recipe). Going back to our example, John uses an authentic wood-fired oven to bake his pizza. Whenever a tree is cut down, a new tree can be planted in its place and grow to the same size in a few years. By contrast, a gas-fired oven uses non-renewable resources, because there is no way to replenish the gas (at least not for several thousand years). It is clear that, as much as we’ve learned about the factors that create and support productivity differences, much is left to be done.

The growth engine definition in economics refers to a system that is the underlying driver of economic expansion. An increase in productivity is one of the most important factors in sustainable long-run growth in an economy. This is due to how an economy cannot grow and expand if no value is being created within it.

Beyond this achievement however, most parts of Africa are still battling with low crop productivity resulting in food shortages and food insecurity. The yields of many staple crops are still far below their agronomic potentials with output four determinants of productivity increases being attributed largely to area expansion. This paper examines the implications of the current trends of crop/plant productivity for food security and rural livelihood development in Africa using Ghana as a case study.

This has sparked a broad research effort to identify the determinants of productivity. This column summarises a wealth of literature that tries to understand what determines productivity, which is often referred to as a measure of our ignorance. It concludes with a call for more data – including currently unmeasured aspects of business’s production practices such as producer-level prices. While collecting more data is costly, this column argues that there is much to be gained in exchange. We’re talking about productivity, which is an economy’s long-run growth engine. Before we begin, I want you to imagine the engine of an automobile.

The new findings offer two categories of explanations for inter-firm productivity differences. Increased productivity sees the laborer as an individual earning more money in higher wages. This enables them to buy more goods and services, increasing consumption and consequently leading to greater individual wellbeing.

  1. The four determinants of productivity include physical capital, natural resources, human capital and technological productivity.
  2. During the past 25 years, economists have gained increased access to broad and detailed data on firms’ production activities.
  3. In other words, more specialized equipment increases John’s productivity.
  4. After finishing his high school diploma, John went to culinary school.
  5. Since there was a very limited amount of goods and services available but an immense amount of money to essentially ‘”bid”‘ on these products, an occurrence known as demand-pull inflation took place.
  6. When a nation invests in these four things, it will not only increase productivity but will raise its standard of living.

Finally, when a nation invests in natural resources, it can develop them in productive ways. When a nation invests in these four things, it will not only increase productivity but will raise its standard of living. These four determinants of productivity help explain why some nations have grown faster than other nations. The sources of growth for the U.S. economy in the 20th century were presented in the chapter on choices in production. Since 2000, however, the contributions from improvements in factor quality and technology have accounted for about half the economic growth in the United States.


The organisational structure of the firm’s production units – the vertical and horizontal linkages between the industries they operate in, their relative sizes, etc. – can affect the productivity levels of the firm’s component business units. The very act of operating can increase productivity, as experience allows producers to identify opportunities for process improvements. Research has pointed to several within-business productivity drivers, which of each is, in essence, an input that is not measured or mis-measured in the standard data sets.

Let’s also say that Tom loves to eat salmon, and it just so happens that there are salmon in the ocean off the coast of this desert island. That means that his standard of living, which is his economic well-being, is totally determined by how productive he is. Technological knowledge refers to society’s understanding of the best ways to produce goods and services. That means it describes technological progress within the economy.

Productivity in Economics

Economist uses it to forecast future levels of GDP growth through capacity utilization . These factors can be analyzed in terms of a number of elements, namely, supply, utility, organization, resources, and quality. However, this discussion will specifically examine the factors of physical capital, technology, human capital, and natural resources.

Economic activity is based on the exchange of value, and before that value can be exchanged, it needs to be created. It is this process of creating that value that involves productivity. Without productivity, goods and services will not be created, meaning there is nothing to be exchanged, seeing no economic activity will occur, which results in a collapsing system. When output largely outweighs input, it can be considered that efficient production is achieved.

Aishwarya provides a neat breakdown of the determinants of productivity from human capital to available resources and money its useful for anyone trying to understand the concept better. Productivity differences explain much of the per capita income variation across countries. Recent work has been building a case that a substantial portion of these productivity gaps arise from poor allocation of inputs across production units in developing countries. But while we know some distortions exist, we haven’t really yet pinned down exactly what those distortions are.

What determines productivity?

Although he mainly washed dishes and brought out the trash, he learned a lot about working in a kitchen. After finishing his high school diploma, John went to culinary school. Finally, he worked as a commis at an Italian restaurant for some time to gain work experience.

If you think of an economy as a car, then productivity is its long-run growth engine. We’ll come back to this later, but now I want you to go with me on a little trip. Productivity, in economics, is defined as the degree of efficiency at which goods and services are produced. Economists place tremendous emphasis on productivity since it is one of the driving forces behind any economy.

Just imagine a car is driving on the expressway going 55 miles per hour through the town of Ceelo. If you could see under the hood of that car while it’s in motion, you could see that the engine is in there. This is a four-cylinder car, which means that inside the engine there are four cylinders going up and down, and this is what makes the car go.

In order to devote resources to increasing physical and human capital and to improving technology—activities that will enhance future production—society must forgo using them now to produce consumer goods. Even though the people in the economy would enjoy a higher standard of living today without this sacrifice, they are willing to reduce present consumption in order to have more goods and services available for the future. Productivity is typically thought of as a supply-side concept. However, because production microdata typically lacks producer-specific price information, within-industry price differences – often caused by differences in demand conditions – are embodied in output and productivity measures. High- (low-) price producers look more (less) technically efficient than they really are.

Productivity in Economics Definition, Importance & Impact

In order to avoid any issues with the town judge (you guessed it, Tom), he calls the mob for help (if you said Tom, you’d be correct). In all seriousness, Tom’s productivity, or output per unit of input, is affected by four primary factors. Suppose that Tom, an economist, is on a three-hour tour in a boat on the ocean.

People had the money to buy a tremendous number of goods, but there was not enough productivity taking place to meet that demand. Productivity in economics refers to how much an entity produces proportionately to how much it puts into production. List and discuss at least three distinct determinants ofproductivity.

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