Importance of Productivity for an Economy and Factors Contributing to Productivity and Its Impact on Sustainable Economic Growth

This article discuss the impotance of productivvity improvement for any economy to enjoy sustainable economic growth with low inflation.

mportance of productivity for an Economy and factors contributing to productivity and its impact on sustainable Economic Growth
The Definitions of Economic productivity
The economic productivity refers to the cost of factor input and the value of its output. For example if productivity is improved consistently the cost of production or unit cost comedown drastically and there fore it increases consumer welfare as prices comes down.
The measurement of productivity and the problems of measuring productivity
In theory as mentioned above the concept of productivity is straight forward. However, in practice to measure productivity is not easy. This is because, productivity can be increased by unemployed labor or increasing the work day or under severe adverse conditions and there fore productivity can be apparently increased. If this achieved by the above means the productivity is not improved but worsened. There fore the productivity must be approached by the appropriate means not achieved in adverse conditions. In addition, the productivity to measure services is not easy as services output cannot be easily measured accurately. This applicable to education, government services and other service industries.
The main factors affecting productivity in an economy
The productivity of an economy depends on many factors. However, all factors are do not contribute to productivity. However, there are common factors irrespective of the nature of economies boost productivity. The main factor increasing productivity is the availability and the quality of capital and labor resources particularly the skilled and semi-skilled workforce and the flexibility of the labor market. Another factor is the innovate capacity of private and public institutions and the incentives to innovate and consistent technological dynamic development. Another crucial factor contribute to productivity improvement is the level of research and development and the quality of education and training system. In addition, productivity also depends on the level of business taxation and regulatory regime. For example, if business is overly regulated it may have adverse effects on productivity as it may discourage business to invest in productivity enhancing activities because of cost of regulation and risk in investment. In some economies, the amount and quality of natural resources like water, soil quality and other mineral resource availability to greater extent if the majority of economic activity depends on such resources. However, in other economies also will be affected because of oil and other resources are important factor in its cost and quality which determines productivity. Another important factor for long-term productivity growth is the quality of social and physical and technological infra-structure.
If any economy do not concentrate on the major forces of productivity and not have economic policies to address any deficiency compared to other nations they may not be competitive in the global economy and may adversely affected in terms of sustainable economic growth potential and dynamic efficiency of the economy.
The relationship between productivity and economic growth
The main reason productivity has an impact on economic growth is due to the fact productivity improves the profitability of business enterprises and the dynamic efficiency of the private enterprises and there fore increase the level of investment in the economy and there fore increase the potential output of the economy as a whole in the long-term. That is it has the effect of moving the aggregate long tern supply curve to the right. As well, it will enable the economy to grow with less inflation and there fore increase the economic growth rate. As well, as it increases sustainably the real income of the workforce in general in the long-term it increases the consumption potential of consumers and there fore increase aggregate demand and through the multiplier effect produces consistent economic growth. In other words, government polices directed towards productivity improvement in most of the important sectors of the economy as well as the efficiency of the public sector enables the economy as whole to be more productive. This will also enable the economy to have sufficient resources and technology to tackle environmental issues effectively at a minimum cost. In addition productivity improvement also has the effect of attracting international capital to the economy and investment in the economy there by increasing the potential capacity to produce or lift the production possibility curve to the right.
Summary
As mentioned above, the concept of productivity is important for any economy. However the measurement of productivity is not easy. Any economy's productivity is dependent on some crrucial factors. If these factors are neglected over a period of time and if it lags behind some major competitors in a global economy it has severe negative consequences in terms of its economic performance. It is also important to note all economies have some unique factors depending on their economic structures. However, there are some common factors, which determine productivity improvement over a long-term. As discussed above, productivity affects the rate of economic growth and consumer welfare by increasing the level of investment, consumer spending, foreign investment, possibility to control inflation and non-inflationary economic growth and there for to ensure consistent and sustainable economic growth with less boom and bust cycles. It is important that government must play its appropriate role in engendering dynamic efficiency and allocation efficiency so that it can move the aggregate long term supply curve move consistently over a long period of time. In effect, productivity enhancing polices by private and government is a crucial economic welfare and standard of living as well as quality of living of an economy.