Question

How does economics measure productivity? Why is productivity the key to long-run economic growth? How is productivity driven by physical capital, human capital and technological progress

Answer 1

Productivity, in economics, measures output per unit of input, such as labor, capital or any other resource and is typically calculated for the economy as a whole, as a ratio of gross domestic product to hours worked whereas at the firm level, productivity is a measure of the efficiency of a company's production process which is calculated by measuring the number of units produced relative to employee labor hours or by measuring a company's net sales relative to employee labor hours.

When productivity fails to grow significantly, it limits potential gains in wages, corporate profits and living standards. Investment in an economy is equal to the level of savings because investment has to be financed from saving. Low savings rates can lead to lower investment rates and lower growth rates for labor productivity and real wages. This is why it is feared that the low savings rate in the U.S. could hurt productivity growth in the future. Increases in productivity helps firms to produce greater output for the same level of input, earn higher revenues, and ultimately generate higher Gross Domestic Product in the long run.

Technological advancements helps produce higher output with lesser inputs needed and it helps in reducing many extra cost like advancement can remove 5 machineries in the firm and replace them with one and physical capital can raise the people working hard for the work to be completed as with the help of physical capital they can raise their wages and demand from them to raise the output input ratio.