Introduction

Chapter 8.4

Chapter 8.4, which deals with productivity, requires more attention. You have to be able to define productivity in general and labour productivity in particular. Also note the definition of capital productivity and the shortcomings of such partial productivity measures. Study the five ways in which productivity can be increased and make sure that you can explain why multifactor productivity is also an important indicator.

Box 8-1 must also be studied. Note the definitions of labour intensity and capital intensity and make sure that you can define the three indicators often used in this regard (i.e. the capital-output ratio, incremental capital-output ratio and capital-labour ratio).

Activities

1 Productivity is simply a ratio between output and the inputs used to produce that output.

2 Labour productivity can only be increased through the efforts of the workers in question.

3 Labour productivity cannot increase if both total output and the quantity of labour input fall.

4 If the capital stock increases while output falls, capital productivity increases.

5 Labour productivity can increase as a result of an increase in the capital stock.

6 The capital-output ratio is obtained by dividing the real capital stock by the real output in the economy.

7 The incremental capital-output ratio indicates how much additional capital (i.e. investment) is required to produce an additional unit of output.

8 If productivity increases at a faster rate in Vietnam than in Poland, it follows that the level of productivity is higher in Vietnam than in Poland.

9 To obtain unit labour cost one has to divide the nominal cost of labour by the quantity of output.

10 Unit labour cost is one of the best available indicators of competitiveness.

11 When labour productivity increases, unit labour cost also increases, ceteris paribus.

11 If labour productivity in Country A increases by 5% per annum and labour productivity in Country B increases by 2% per annum, while earnings per worker increase by 8% in A and 2,5% in B, it follows that A has become more competitive than B (assuming that exchange rates remain unchanged).