Productivity is defined as the measurement of “output per unit of input, such as labor, capital or any other resource.” That’s a clunky way of saying that individual workers, businesses, industries, whole segments of the economy and even entire countries are more productive when they make more with less. That, of course, is a simplification. Here’s a deeper dive into the concept of productivity and what it means for you.
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Who Cares About Productivity?
You care about productivity whether you realize it or not, particularly if you like having nice stuff. Nothing factors more heavily into a country’s material standard of living than the growth or decline of productivity. In wealthy, industrialized nations like the kind you have the luxury of living in, productivity growth is high. The economies of poor, developing countries are characterized by low productivity — but its impact on your life doesn’t stop there.
- Low productivity generally means an economy is heading toward recession.
- Businesses consider productivity when investing in labor and technology. You might find yourself out of work, for example, if your boss decides it would be more productive to outsource your job to another country or to a robot.
- Governments measure productivity to determine if the taxes you pay should be raised or lowered.
- Central banks consider productivity when setting key interest rates that determine the cost of borrowing money for things like home and auto loans.
- America and every other country can raise its standard of living only if it can increase its output per worker.
Consider the Model T Example
Productivity increases when you make the same amount or more of something with less labor and material costs than before. One of the clearest examples is Henry Ford’s great leap forward. By streamlining auto manufacturing with the modern assembly line, Ford squeezed every drop of productivity out of both his people and his machines.
Now that Ford could make more cars for less money in fewer hours with fewer workers, prices dropped so much that many more people could afford to buy one. In a single decade between 1919-1929, automobile registrations rose from 6.7 million to 23.1 million — a dramatic increase in the national standard of living. Those newly minted motorists hadn’t gotten wealthier. Ford had just become more productive. Now they could hop in their Model Ts and cover many more miles in much less time with much less effort than walking — in other words, they had become more productive themselves.
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The GDP Is the Yardstick
Gross domestic product (GDP) is the most important measurement that economists use to gauge national productivity. It’s also the most telling snapshot of any country’s economic health. Defined as the “total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period,” GDP is essentially a scorecard of a country’s economic well-being.
Since it’s used to determine whether a country’s economy is growing, retracting or remaining stagnant, it’s almost always the case that businesses and their employees are better off when the national GDP is growing and worse off when it’s not. In the end, when it comes to productivity, more is definitely better.
This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.
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Last updated: Feb. 4, 2021