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What is Productivity?

Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Productivity” The relationship between inputs and output, which can be applied to individual factors of production or collectively. Labour productivity is the most widely used measure and is usually calculated by dividing total output by the number of workers or the number of hours worked. Total factor productivity attempts to measure the overall productivity of the inputs used by a firm or a country. Alas, the usefulness of productivity statistics is questionable. The quality of different inputs can change significantly over time. There can also be significant differences in the mix of inputs. Furthermore, firms and countries may use different definitions of their inputs, especially capital. That said, much of the difference in countries' living standards reflects differences in their productivity. Usually, the higher productivity is the better, but this is not always so. In the uk during the 1980s, labour productivity rose sharply, leading some economists to talk of a 'productivity miracle'. Others disagreed, saying that productivity had risen because unemployment had risen - in other words, the least productive workers had been removed from the figures on which the average was calculated. There was a similar debate in the united states starting in the late 1990s. Initially, economists doubted that a productivity miracle was taking place. But by 2003, they conceded that during the previous five years the united states enjoyed the fastest productivity growth in any such period since the second world war. Over the whole period from 1995, labour productivity growth averaged almost 3% a year, twice the average rate over the previous two decades. That did not stop economists debating why the miracle had occurred. By Barry Norman, Investors Trading Academy - ITA