Productivity: The Economy's Long-Run Growth Engine

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  • 0:04 Productivity
  • 3:36 Physical Capital and…
  • 5:44 Human Capital and…
  • 7:36 Productivity of a Nation
  • 8:56 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Using real-world examples, you'll learn more about what productivity is and four things that determine it within a nation - physical capital, technology, human capital, and natural resources.

Productivity

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. 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. Imagine you're looking at the inside of the engine. 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. 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.

Suppose that Tom, an economist, is on a three-hour tour in a boat on the ocean. Everything is going great until he gets caught in a terrible storm and becomes stranded on a desert island. After about six hours of wandering around the island, Tom finds a volleyball that washed up from the ocean and, feeling somewhat lonely, decides to name it Wilson and talk to it throughout the day. Thankfully, a brand new portable gas grill washes up next to the volleyball. How cool is that! Tom is a great example of a one-man economy, because everything that Tom wants to consume, he must also produce. That means his income is totally equal to his production. 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.

Productivity is the amount of output that gets produced per unit of input. Tom's productivity will be measured in terms of how many salmon he can catch with a given amount of effort. Labor productivity is the rate of a worker's output per unit of input in a certain amount of time. Tom's labor productivity will be measured in terms of how many salmon he can catch in an hour. If he catches only a few salmon, his labor productivity is low. If he catches a lot of salmon, then his productivity level is high. What we want to know in this lesson is: What determines Tom's productivity? If we can increase his productivity, then we can make his economy grow for a long time, because productivity is an economy's long-run growth engine.

The first thing we want to keep in mind is that Tom is a sole proprietorship, a one-man band, a one-person economy, meaning that he's the grunt worker, the HR department and the CEO, all rolled into one. In fact, when Tom needs approval to change the location of Wilson, his volleyball, he is concerned that the neighbors (that's Tom) will complain to the city council (also Tom) about having too much traffic. 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. Let's take a look at each one.

Physical Capital and Technology

The first thing that affects Tom's productivity is how many fishing poles he has. Let's say that Tom is able to create one fishing pole. Assuming he can catch one fish per hour, then after an eight-hour workday in the beautiful sunshine with a clear blue ocean and no cubicles in sight, Tom is able to produce 8 x 1 = 8 fish. This is enough for him to make salmon sandwiches, smoked salmon (I love smoked salmon by the way), salmon croquettes, grilled salmon, poached salmon and salmon étoufée. Okay, let's get back to the fishing poles. The more fishing poles that Tom has, the more salmon he can catch. If he has two poles, he can catch 16 salmon per day instead of eight. The fishing poles in the illustration are tools that Tom uses to be productive. Economists call this physical capital. Physical capital is the equipment and structures used to produce goods and services. Workers are more productive when they have more tools to help them produce.

The next thing that affects Tom's productivity is how much understanding and ideas he has access to about the science of fishing and what the best methods are for catching salmon. If Tom has no access to this knowledge, he catches nothing and eats dirt and talks to his volleyball way too much. Thankfully, while looking under a rock, Tom finds a brand new encyclopedia of advanced fishing techniques (hey, how did that get there?). Anyway, economists call this technology. Technology is a nation's understanding of how the world works. Tom has the encyclopedia, so he has the technology. However, this doesn't mean that he's read the encyclopedia. We'll talk about that in a minute. But having the encyclopedia is the first step to being able to use what's in it.

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