In discussing economic growth, often the debate revolves around the concept of “Income Growth” and “How Does Productivity Relate To Economic Growth.” Often those on the left side of this debate are those who feel that the only way to truly increase living standards is through economic growth and the corresponding increase in goods and services. The belief is that increasing economic output will create more jobs, and thus increase employment and income potential. Those on the right side of this debate believe that economic output, while needed, is not enough and that additional investment in human capital and technology or other advanced processes would be beneficial to economic development. When either side debates the validity of the other, it is important to take a closer look at productivity and the process by which it relates to economic growth.
Productivity growth can be viewed in two different ways. One way is from the standpoint of wages, which are the value of all that an individual, team, or society produces in a given time period. The other way productivity is viewed is from the standpoint of the production of goods and services. It is important to keep both types in mind when debating the validity of productivity as a determinant of economic growth. If the goal of economic development is to have more goods and services available to consumers then increased productivity from increased economic output is indeed desired. But if the goal is to simply increase the overall wealth of the society then increasing productivity through economic production is not relevant.
As mentioned earlier, production must be examined closely at both the national and global level. In doing so, productivity becomes a key determinant of economic growth. The amount of total factor productivity, or TFP, refers to the total economic output of a nation or region measured on the scale of the value of the items produced. TFP can appear as production, employment, wealth or income.
How does productivity relate to economic growth at the national level? Productivity is directly related to economic growth, because the rate of economic growth is a function of the rate of productivity. When economic activity increases, so does the rate of productivity. Conversely, when economic activity decreases, so does the rate of productivity. Thus it is possible to see why an increase in the number of people producing is one of the most important factors in increasing economic growth.
Productivity growth is also important because of the increased goods and services available to consumers when economic growth occurs. More goods and services means more demand for the products produced. This, in turn, leads to higher prices paid for those products and services. Ultimately, this will lead to increased income, which in turn leads to higher consumption. Thus, productivity is directly tied to economic growth because the greater the economic output, the greater the income for everyone involved in the process. Of course, there are many other factors that are considered when discussing the matter of productivity and economic growth but the above are some of the most important ones.
It should be fairly easy to see the connection between productivity and economic growth. Keep these factors in mind as you consider how productivity relates to economic growth. With the right direction and the proper tools, anyone can quickly understand the concepts and begin to implement them.