Differences in productivity

Economic Development – Differences in Economic Development between Countries

Objective: Understand Differences in Productivity

Productivity – the amount of output produced per unit of input – is a key driver of economic development. Countries with higher productivity can generate more goods and services from the same resources, leading to higher incomes, better standards of living and faster economic growth.

1. What is Productivity?

In economics, productivity is usually expressed as:

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Productivity = \frac{\text{Total Output (e.g., GDP)}}{\text{Total Input (e.g., labour hours, capital)}}

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Two common measures are:

• Labour productivity: output per hour worked.
• Multi‑factor productivity (MFP): output per combined unit of labour, capital and other inputs.

2. Why Productivity \cdot aries Between Countries

Several inter‑related factors explain why some countries are more productive than others:

1. Human capital – education, skills, health and work experience.
2. Physical capital – machinery, infrastructure, technology.
3. Institutional quality – property rights, rule of law, regulatory efficiency.
4. Innovation and technology adoption – R&D, diffusion of new processes.
5. Natural resources – quality and accessibility of land, minerals, energy.
6. Economic policies – trade openness, fiscal stability, monetary policy.

3. Measuring and Comparing Productivity

These figures illustrate the wide gap in both labour and multi‑factor productivity across different stages of development.

4. Illustrative Case Study: Manufacturing Sector

Consider two countries that both produce 1 million shirts per year.

• Country X uses 10 000 labour hours and modern automated sewing machines.
• Country Y uses 25 000 labour hours and manual stitching.

Labour productivity for each country is:

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\text{Productivity}_{X} = \frac{1\,000\,000}{10\,000} = 100 \text{ shirts per hour}

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\text{Productivity}_{Y} = \frac{1\,000\,000}{25\,000} = 40 \text{ shirts per hour}

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Country X’s higher productivity means lower unit costs, higher profits and the ability to invest in further technology – a virtuous cycle of development.

5. Implications for Economic Development

• Higher productivity raises real wages, improving living standards.
• It attracts foreign direct investment (FDI) because firms seek efficient locations.
• Productivity growth is essential for sustainable long‑term growth; without it, economies can stagnate even if they have abundant resources.
• Policies that enhance education, health, infrastructure and institutional quality tend to have the biggest impact on productivity.

6. Suggested Diagram

7. Summary

Differences in productivity are at the heart of why some countries develop faster and achieve higher living standards than others. By improving human capital, investing in physical capital, fostering innovation and strengthening institutions, less‑developed economies can narrow the productivity gap and accelerate economic development.