It is sometimes easy to overlook the importance of productivity. National figure

Question

It is sometimes easy to overlook the importance of productivity. National figures are often reported in the media. They may seem to be ho-hum; there’s nothing glamorous about them to get our attention. But make no mistake; they are key economic indicators—barometers, if you will, that affect everybody. How? High productivity and high standard of living go hand-in-hand. If a country becomes more service-based, as the United States has become, some (but not all) high-productivity manufacturing jobs are replaced by lower-productivity service jobs. That makes it more difficult to support a high standard of living. Productivity levels are also important for industries and companies. For companies, a higher productivity relative to their competitors gives them a competitive advantage in the marketplace. With a higher productivity, they can afford to undercut competitors’ prices to gain market share or charge the same prices but realize greater profits! For an industry, higher relative productivity means it is less likely to be supplanted by foreign industry.  

Questions     1. Why is high productivity important for a nation? 2   . Why do you suppose that service jobs have lower productivity than manufacturing jobs? 3   . How can a company gain a competitive advantage by having higher productivity than its competitors have?   

Explanation / Answer

1. High productivity is important for nation because high productivity is an economic indicator and is closely related to the standard of living in a nation. If the wage and price increases are not accompanied by productivity increases, it may lead to inflationary pressures on a nation’s economy. When the productivity increases, standard of living also becomes high.

2. The main reason for low productivity in service jobs are the difficulty in measuring productivity of service jobs compared to manufacturing jobs based on the output produced. Manufacturing jobs have clear and visible output and hence the measurement is very easy and predictable. But in service based jobs, productivity depends on intellectual activities and hence it may change based on many factors including personal and situational differences. The high degree of variability makes it difficult to achieve productivity improvement. All these factors lead to the conclusion that service jobs have lower productivity than manufacturing jobs.

3. When two firms involved in competition produce same output, the firm with higher productivity needs less input of raw materials to produce the output. Hence the firm will be able to lower the price of the product and consequently increase its market share. Otherwise the firm will be able to make more profit by charging the same price. Thus higher productivity helps to gain competitive advantage for the firm compared to its competitors.  

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