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Productivity Measurement

Productivity Measurement

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Published by Tarun Daga

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Published by: Tarun Daga on Oct 14, 2009
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 TEAM MEMBERS:Apoorva Jain Tarun Daga
Productivity refers to measures of output from production processes, per unit of input. Labour productivity, for example, is typically measured as a ratio of output per labour-hour, an input. Productivity may be conceived of as a measureof the technical or engineering efficiency of production. As such quantitativemeasures of input, and sometimes output, are emphasized. Productivity isdistinct from measures of allocative efficiency, which take into account both thevalue of what is produced and the cost of inputs used, and also distinct frommeasures of profitability, which address the difference between the revenuesobtained from output and the expense associated with consumption of inputs.
Purposes of productivity measurement 
Productivity is commonly defined as a ratio of a volume measure of output to avolume measure of input use. While there is no disagreement on this generalnotion, a look at the productivity literature and its various applications revealsvery quickly that there is neither a unique purpose for, nor a single measure of,productivity. The objectives of productivity measurement include:
A frequently stated objective of measuring productivitygrowth is to tracetechnical change. Technology has been described as “the currently known waysof converting resources into outputs desired by the economy” (Griliches, 1987)and appears either in its disembodied form (such as new blueprints, scientificresults, new organisational techniques) or embodied in new products (advancesin the design and quality of new vintages of capital goods and intermediateinputs). In spite of the frequent explicit or implicit association of productivitymeasures with technical change, the link is not straightforward.
 The quest for identifying changes in efficiency is conceptuallydifferent fromidentifying technical change. Full efficiency in an engineering sense means thata production process has achieved the maximum amount of output that isphysically achievable with current technology, and given a fixed amount of inputs (Diewert and Lawrence, 1999). Technical efficiency gains are thus amovement towards “best practice”, or the elimination of technical andorganisational inefficiencies. Not every form of technical efficiency makes,however, economic sense, and this is captured by the notion of allocativeefficiency, which implies profit-maximising behaviour on the side of the firm.One notes that when productivity measurement concerns the industry level,efficiency gains can either be due to improved efficiency in individual
establishments that make up the industry or to a shift of production towardsmore efficient establishments.
Real cost savings.
A pragmatic way to describe the essence of measured productivity change.Although it is conceptually possible toisolate different types of efficiency changes, technicalchange and economies of scale, this remains a difficult task in practice.Productivity is typically measured residually and this residual captures not onlythe above-mentioned factors but also changes in capacity utilisation, learning-by-doing and measurement errors of all kinds. Harberger (1998) re-stated thepoint that there is a myriad of sources behind productivity growth and labelled itthe real cost savings. In this sense, productivity measurement in practice couldbe seen as a quest to identify real cost savings in production.
Benchmarking production processes.
In the field of businesseconomics, comparisons of productivity measures for specific production processes can help to identifyinefficiencies. Typically, the relevant productivity measures are expressed inphysical units (e.g. cars per day, passenger-miles per person) and highlyspecific. This fulfils the purpose of factory-to-factory comparisons, but has thedisadvantage that the resulting productivity measures are difficult to combine oraggregate.
Living standards.
Measurement of productivity is a key elementtowards assessing standards of living. A simple example is per capitaincome, probably the most common measure of living standards: incomeper person in an economy varies directly with one measure of labourproductivity, value added per hour worked. In this sense, measuringlabour productivity helps to better understand the development of livingstandards. Another example is the long-term trend in multifactorproductivity (MFP). This indicator is useful in assessing an economy’sunderlying productive capacity (“potential output”), itself an importantmeasure of the growth possibilities of economies and of inflationarypressures.
Main types of productivity measures
 There are many different productivity measures. The choice between themdepends on thepurpose of productivity measurement and, in many instances, on the availabilityof data. Broadly,productivity measures can be classified as single factor productivity measures(relating a measure of output to a single measure of input) or multifactor productivity measures(relating a measure of output to a bundle of inputs). Another distinction, of particular relevance at the industry or firm level is between productivitymeasures that relate some measure of gross output to one or several inputs andthose which use a value-added concept to capture movements of output.

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