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Productivity » Productivity

What you'll learn this session

Study time: 30 minutes

Edexcel spec: 1.2.2 (a) and (b)

What productivity means and how to calculate it
What makes land more productive: fertiliser, drainage, irrigation and reclamation
What makes labour more productive: education, training and migration
What makes capital more productive: more of it and better technology

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What is productivity?

Two bakeries can have the same number of staff and the same ovens, yet one makes far more loaves in a day. The busier one is more productive. Productivity is a key idea in Business Economics, which is examined on Paper 1.

Key terms:

Productivity: a measure of how efficiently resources are used, found by output per worker or output per unit of any other input.
Input: a resource used to make a good or service, such as workers, land or machines.
Fertiliser: a substance added to soil to give plants the nutrients they need.
Irrigation: supplying water to crops through channels, pipes or sprinklers.
Drainage: removing extra water from waterlogged land.
Reclamation: turning unusable land, such as marshland or sea bed, into land that can be used.
Migration: people moving from one place or country to another to live and work.
Technological advance: a new or improved way of making things, often using better machines or software.

Calculating productivity

The most common measure is labour productivity:

Labour productivity

Productivity = total output / number of workers

You can use the same idea for other inputs. Output per hectare of land measures how productive land is. Output per machine measures how productive capital is.

Worked example

A pottery in the town of Calder employs 12 workers. Together they make 960 mugs a week.

Productivity = 960 / 12 = 80 mugs per worker per week.

The owner buys a faster kiln. The same 12 workers now make 1,200 mugs.

New productivity = 1,200 / 12 = 100 mugs per worker. Productivity has risen by 20 mugs per worker.

Worked example: land

A farm grows 90 tonnes of barley on 30 hectares. Output per hectare = 90 / 30 = 3 tonnes per hectare.

Notice that productivity can rise even if output stays the same. If the pottery made 960 mugs with only 8 workers, productivity would be 960 / 8 = 120 mugs per worker. Higher productivity means more is made from the same resources, or the same is made from fewer resources.

Why does this matter? Higher productivity usually means lower cost for each item made, so firms can make more profit or charge lower prices. For a whole country, it means more goods and services from the same resources.

Factors that affect the productivity of land

Irrigation brings water to dry fields, raising the output from each hectare: better land productivity

Land means natural resources, so its productivity is how much it can produce per hectare. There are four ways to raise it.

🌱 Fertiliser

Adding nutrients to poor soil helps crops grow bigger, so each hectare gives more food.

💦 Irrigation

Bringing water to dry land lets farmers grow crops where rainfall is low, or grow them all year round.

🌊 Drainage

Taking water off waterlogged fields stops crop roots rotting, so land that was too wet can grow crops.

🏖 Reclamation

Turning unusable land into usable land adds new land. The Netherlands has reclaimed large areas of land from the sea.

Drainage and irrigation are opposites, but they help in different places: irrigation for land that is too dry, drainage for land that is too wet.

Factors that affect the productivity of labour

Training raises human capital, so each worker can produce more in an hour

Labour productivity depends on the quality of the workers.

Education: workers who have learned to read, calculate and solve problems can do more complicated jobs and make fewer mistakes.
Training: learning how to do a particular job, such as how to use a new machine, makes workers faster and safer. A trained electrician can wire a house more quickly than someone who has never done it.
Migration: when workers move into a country, the effect on productivity can go either way. Migrants may bring useful skills that the country lacks, such as nurses arriving in a country with too few, which can raise productivity. On the other hand, if migrants arrive with few skills for the jobs on offer, or cannot speak the local language well at first, productivity may fall for a while until they are trained. Migration out of a country can also take skilled workers away.

Education and training are said to improve a worker's human capital. This simply means the skills and knowledge a worker has. How human capital works in the labour market is covered in a later lesson, Labour Quality and Human Capital.

Factors that affect the productivity of capital

Capital means the machines, tools and buildings used to make things. There are two main ways to raise productivity.

Increased quantity of capital: if each worker has more or better equipment, they can make more. A builder with a cement mixer mixes more cement than one with a spade.
Technological advances: new technology makes capital work faster, more accurately or for longer. Examples are robots on a car assembly line, computers that handle orders, and faster delivery vans with route planners. A farm that moves from hand milking to milking machines produces more milk per worker.

New technology often costs a lot to buy, and workers may need training to use it. Capital and labour work together, which is why firms often invest in both.

Common mistakes

Confusing productivity with output. Output is the total amount made. Productivity is the amount made per worker or per input. A firm can make more in total by hiring more workers, with no change in productivity.

Dividing the wrong way round. Productivity is output divided by workers, not workers divided by output.

Saying that migration always raises productivity. The effect depends on the skills of the migrants and the jobs available, so give a reason either way.

Exam-style question

Farmer Idris grows tomatoes in a hot, dry region. Last year he employed 8 workers and produced 4,000 kg of tomatoes. This year he installs a pipe system to water the plants. He trains his 8 workers to use it and produces 5,600 kg.

(a) Calculate the labour productivity last year. [2 marks]

(b) Calculate the percentage increase in labour productivity this year. [2 marks]

Model answer

(a) Productivity = output / workers (1) = 4,000 / 8 = 500 kg per worker (1).

(b) This year: 5,600 / 8 = 700 kg per worker (1). Increase = (200 / 500) x 100 = 40% (1).

(c) Irrigation (1): the pipes bring water to dry land, so each plant grows better and gives more tomatoes from the same land and workers (1). Training (1): trained workers can use the system correctly and work faster, so each worker looks after more plants and output per worker rises (1).

Exam tip

In a "calculate" question, write the formula first and show each step. If you slip on the arithmetic, you can still earn marks for the method.

Recap

Productivity is output per worker or per input. Labour productivity = total output / number of workers.
Land: fertiliser, irrigation, drainage and reclamation.
Labour: education, training and migration.
Capital: more of it, and better technology.

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