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What Is the Connection Between Productivity and Economic Growth?

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  • Written By: Daniel Liden
  • Edited By: Jenn Walker
  • Last Modified Date: 07 August 2014
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Economic growth is characterized by an increase in an economy's ability to provide for the wants and needs of those who belong to a given society. Productivity and economic growth are closely linked because economic growth occurs when productivity increases to allow for such growth. Productivity occurs when various raw materials and other productive prerequisites, such as manpower and technology, are used to make some final product that is sold to and used by consumers. When productivity decreases without a corresponding decrease in demand, prices rise and fewer people are able to get what they want or need, so economic growth does not occur.

There are many different factors that can contribute to increases or decreases in productivity and economic growth. Availability of the necessary resources and raw materials, for instance, is essential if any production is to occur. Increasing the overall level of employment in a society and the amount of productivity of which each individual is capable is also essential for an overall increase in both. Further factors, such as technology and government policy, can also substantially affect a society's productive capacity. With an increase in productivity, a given society is able to directly or indirectly provide more people with what they need or want, thereby leading to economic growth.

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Increased productivity can be viewed as a decrease in the input necessary to obtain the same output. If, for example, one unit of a product that was formerly produced by two people over the course of an hour could be produced by one person in 30 minutes, an increase in productivity would have occurred. More of the same product could be produced more rapidly and with less expense, assuming that the costs of the raw materials remain constant. Growth and productivity increase together as the increase in productive capacity increases the ability of the economy to provide for the wants and needs of all members of the society.

It should also be noted that these two factors can be increased through the introduction of new products, technologies, and services. The contribution of new goods and services to the society further contributes to what the members of that society can possess. In some cases, however, the introduction of new products and services renders older products and services obsolete, thereby damaging certain sectors of the economy. Such new products and services can, however, usually be produced more cheaply and efficiently than the older alternatives, so an overall increase in productivity and economic growth usually still occurs.

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anon348053
Post 4

A seven day a week work culture is a better idea = more and better jobs = better productive societies = better economic growth.

ZipLine
Post 3

@SarahGen-- An economy cannot grow without production. Production equals growth, it's as simple as that. Countries that produce more grow faster and are richer than other countries.

donasmrs
Post 2
@SarahGen-- I'm not an economist and this is just my opinion: investments are very important for an economy, but so are many other factors like supply, demand, technology and production.

I don't think that an economy that doesn't produce can maintain a good standing for long. The investments that you refer to as "hot money" can disappear as soon as they appeared if there is any kind of economic or political instability in that country. But if there is production, the economy will grow in a more stable way.

SarahGen
Post 1

Can direct investments make up for the lack of productivity in the economy?

Some countries rely on hot money instead of production to maintain their economy. Companies from other countries invest and do business in these economies to take advantage of lower interest rates or tax exemptions. But how long can this continue? Why do some governments prefer this over production?

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