Determinant Factors of Macro-level Productivity Growth
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Main Determinant Factors of Macro-level Productivity Growth
Several determinants have impact on productivity growth in the micro, macro and sectoral levels. Most importantly, education, health, technology, environmental factors, imports, infrastructure, capital investment, institution, rivalry, geographical disparities and absorptive capacity affect total productivity growth (Isaksson, 2007). Based on the sector and development agenda, it is essential to identify the most important determinants that policy should focus on to improve productivity growth, presenting opportunities to enhance the welfare of the people of a society. The determinant factors affect productivity growth and have implication on policies to different extents sparking change in the total factor productivity (Kumar, 2006).
Distinguishing between labor productivity and the total factor productivity as change in labor productivity often depends on total factor productivity growth and capital penetration. On the other hand, the capital penetration and productivity growth are also affected by the change in the labor productivity. Capital intensity and investment can be considered as long-term factors that have effect on productivity growth at the macrolevel, which are then interconnected to factors as the integration, institution, and geography (Isaksson, 2007). Government policies focus on the determinant factors of productivity growth in policy making while on the other hand sound systems are also capable of affecting such factors raising productivity growth.
Government investment in human capital can expand absorptive capacity, enabling technology transfer while raising foreign capital income. Government policies that increase capital formation or resource allocation, in the end positively affecting productivity growth if such actions are undertaken in institutions within favorable environments (Kumar, 2006). Policies favoring direct foreign investment, on the other hand, have apositive implication on total productivity growth only if geographical issues are handled appropriately in prior.
Productivity should be produced by the same level of factor inputs through a combination of labor and capital of a state. Total factor productivity is a sure measure of productivity growth than any aspect as it takes into account deviations in capital to use and that of the size of the labor force (Isaksson, 2007). Productivity is commonly used as a determinant of the living standard and the status of the social welfare since it provides for the quantification of how the available resources in the economy are utilized comparing inputs and outputs. Higher level of productivity leads to lower unit cost, which increase demand and production thereby creating employment because of cost savings. Competitiveness is thus improved, and higher profits achieved resulting from efficiency, which in turn can be invested, in long-term growth.
Rate of national output can gain growth momentum because of raised productivity growth credited to economic growth that, on the other hand, can boost tax revenue and the rate of consumption. In turn, the pay for workers can be raised because of efficiency of employees, at the same time presenting ability of labor being given to different industries at the same time (Isaksson, 2007). The huge productivity gap between nations is evident from the output per worker and the gross domestic product. Sustained improvement in labor productivity can present a positive shift in income trap, raising a country’s GDP and improving its income level.
Change in economic resource may promote the welfare of the people and the economy of a country as productivity growth will be experienced (Kumar, 2006). Adopting and exploiting new technologies and innovations improves efficiency initiating openness and competitiveness that in return stimulates efficiency improvements and productivity growth. Openness accounts for the rise in national income as there will be more foreign direct investment hand in hand with new manufacturing and technology capacity leading to productivity spillover effect within an economy. Policies that focus on infrastructure improvement can improve the overall efficiency of the economy by improving communication and averting transport delays (Isaksson, 2007).
Technology
Countries should be able to access sophisticated technologies, either produced or acquired which in turn is used in knowledge creation and enhancing productivity. International trade in some instances can be a source of technology embodied in the goods that can be exploited due to their higher knowledge content (Isaksson, 2007). Technological progress and innovation advancements have the capacity of influencing the productivity growth and the difference in technological change within areas can be used to explain the growth variations seen. Investment in technology by states establishes a benchmark for the infrastructural development, and with the rapid decline in technology costs, more diffusion is expected within economies. Expansion of the technology sector will provide for enhanced communication and productivity with the rapid progress contributing increased demand.
Technology influences the quantity of output reached maximum and the quality of the inputs requirements. It is important that a country acquire the technologies and innovations available with lower switch costs and for their technical and economic advantage (Crespi& Pianta, 2008). The rate of technology intake is a major factor contributing to the disparity in productivity growth in different countries. Rapid technological progress and greater use of highly productive tools helps to aggregate productivity growth both at the micro and macro levels. Experimentation with new technologies may lead to more significant innovations, new ideas and more rapid emergence of production (Kumar, 2006). There is aneed for policies in states that ease the adoption and intake of technology and encourage more people to use in order to generate more benefits.
Technology provides a set of knowledge and skills that aid in production and service delivery as per the needs of the people and in response to the need to improve the welfare of a society and to present ability to control the environment through the efforts of the population. Technology should thus be expected to pave the way for growth and narrow the disparity in productivity growth in different countries and thus elevating living standards. Technology goes hand in hand with human labor and thus a trained, knowledgeable human workforce commonly referred to as human capital (Isaksson, 2007).
Education and Knowledge Processing
Acquisition and application of productive knowledge are increased in a population where people have proper training and education. Human capital in terms of level of education is a crucial determinant of the economic capacity to implement technological innovations and for the developing countries to fit in with the developed countries to reduce the disparity in terms of growth. The education and training should be geared towards the needs of the economy, and any training initiative should be designed in a way that they positively affect growth, with quality for productivity across sectors (Isaksson, 2007).
Skills are required in adopting new technologies, as innovativeness can be directly linked to proper education of the staff and training (FitzRoy& Kraft, 2005). Even if the relationship between education and productivity is complex, it is an influential factor as higher skills of the labor force add innovativeness making the link between the use of technology and productivity relevant. Scholars argue that finding the evidence between the adoptions of advanced technology is hard to find and agree that the compound relationship is strong. Investment in education has wider economic returns than on an individual. The human level of education has the ability to effect on the income per capita and its long-term impact on the growth rate.
Getting high skills and training to go hand in hand with innovation and technology advancement could expand the benefits of expenditure on education. When such education is tailored towards the productivity needs of the economy the technology process will be fast or the adoption process will be eased. Education contribution in terms of the quality of the workforce and innovation is essential for growth and there should be policies in place that encourage the uptake of higher level education as it will be beneficial to the economy as a whole. The aspect of the acquisition of education to the higher level must, therefore, be balanced with other aspects of the market and the economy to be most efficient (FitzRoy & Kraft, 2005).
Human Capital
According to Isaksson (2007), institutional and productive capacities shape human and social capital endowments. Human capital is interlinked with other determinants of productivity growth, and its accumulation impacts growth potential of countries. Human capital impact productivity growth through quality and quantity dimensions and is linked with other factors that influence growth such as health and education (Kumar, 2006). Any factor that influence labor productivity positively increases human capital capacity, and they are intertwined in a way that no one cannot be explained without the other.
Investment in quality human capital directly benefits productivity growth (Crespi & Pianta, 2008). The governments must thus develop capacity and policies that encourage in improving the dimensions around human capital to achieve growth resulting from human capital. Human capital formation leads to institutional transformation by stimulating political stability.
Health
Health is interconnected to household labor productivity, income, wealth, investment, and savings, and through various forms of capital and technology adoption influences productivity growth, bearing that healthy workforce is more productive. Lower reported mortality and higher life expectancy encourages more saving, with more incentives leading to higher total factor productivity growth. Investors are also not attracted to places with higher disease burdens, which may bring shifts in foreign direct investment (Isaksson, 2007). Health determines the level of education acquisition as healthier people will have higher cognitive ability and pursue education.
Developing countries are likely to experience higher disease burdens than their developed counterparts thus reducing attractiveness to human capital and disability-adjusted life years. If the labor force is affected by the disease, there is a devastating effect on labor productivity lowering the levels of human capital. Disease burden also raises the level of household expenditure reducing capacity of saving, even though families may tend to save more due to uncertainty, they would spend more on healthcare decreasing savings accumulation.
Infrastructure
Many countries invest more in physical infrastructure to enhance productive capacity by increasing resources and enabling the productivity of private capital. It is easy to relate physical infrastructure to productivity growth as the cause can easily be established. There is need for a balanced public investment to minimize crowding effect and bring about the positive impact of private investment and productivity growth (Isaksson, 2007). Impact of infrastructure on the gross domestic product is severe as countries with infrastructure inefficiency must compensate for that through growth penalty. Inefficient infrastructure and more debts to fund infrastructure than little expenses by the governments contributes to the growth variations within countries.
Infrastructure development can trigger growth and provide for supernormal returns if properly managed and financed. Too much investment ininfrastructure, on the other hand, may have minimal returns. Thus proper focus and policies are essential for the same.
Integration
Integration is also an important aspect determining growth. Countries must seek correlations with others to enhance trade, which in turn increases their gross domestic product with eliminated effect of cross-country differences in pricing non-tangible goods. Trade integration will ensure productivity growth where there is openness in terms of exchange and where there is institutional quality (Isaksson, 2007). For low-income countries to experience productivity growth related to trade there must be acertain level of human capital. There must be proper integration policies that would ensure that both the large and smaller countries benefit from trade through import and exports (Crespi&Pianta, 2008) . Policies that encourage resource allocation with respect to market needs irrespective of the influence or possession are vital. Institutions that support economic growth must exist to promote continued productivity growth.
Other Factors
Other factors such as institution, geography and environment also influence productivity growth (FitzRoy& Kraft, 2005). Competition is seen to be a determinant of productivity growth, which is typically induced through monitored privatization. There are areas of inefficiency within the economy that states must cover to increase competitiveness to improve their productivity growth. Social inequalities also tend to affect productivity growth as they affect labor productivity to an extent (Isaksson, 2007). Land and environment need proper regulations that would lead to increased yield of output while reducing undesirable outputs.
Economic democracies, on the other hand, are essential in promoting total factor productivity, even though it affects capital accumulation negatively but with positive productivity growth. Institutional quality is primarily required for improved growth and eliminating benefit of few individuals to the good of a people as a whole. It is, therefore,necessary to give priority to policies that support good institutional quality with a proper focus on human capital. It is also a need to develop plans that will enable the evasion of the poor geography effect while limiting the expansion of non-tradable to ensure proper handling of natural resources.
Effect of Government Policies on Productivity Growth
Government policies have the ability of influencing productivity in almost all the ways. As can be seen in the discussion of the determinants above, there is need for sound policies that provide a conducive environment and well-coordinated institutions that promote factors related to productivity growth. Mexico for instance invested more in social programs with an intention of raising the welfare of the people and redistribute income, which in effect will be replicated in human capital (Levy, 2008). There is a need for policies that encourage the education uptake to a higher level that will help in technology integration and worker efficiency.
According to Isaksson (2007), institutional efficiency and trade integration is another aspect that contributes to productivity. Policies that encourage openness in terms of exchange, those that ensure institutional efficiency and promote integration promotes growth. If both importing countries and exporting countries were deemed to benefit in the event trade then that instance would help in both economies. Infrastructure and investment are also an important aspect of productivity growth. Proper investment of public capital in a balanced manner can allow for private investment too and ensure maximum benefits are achieved. The policy focus on investment should be that which encourage productivity and infrastructural development at the same time. Investment in human capital in terms of health, education, training and welfare eventually leads to higher return than other forms of investment, and that makes countries like Mexico and China take pride in their economic growth.
The Economic Performance of Tunisia for the Period 2007-2011
GDP Per Capita
According to World Bank, the GDP per capita of Tunisia have seen an upward trend over the period. This means that the total domestic product have been increasing beyond the total mid-year population rising from above 3300 to reach slightly below 4000 as in the graph (Bank Group, 2015).
Inflation
Inflation as a measure of annual growth rate has never been constant or with regular trend within the period measured. As it can be seen in the graph, the trend has been rising and falling for each year ranging between 2-6% (Economics, 2015).
Unemployment
Unemployment rate in Tunisia fall between 12% -14% during the period analyzed. According to the National Institute of Statistics, 2007-2009 almost had a flat rate of unemployment, with the trend hitting all-time high in 2011 at 13.3% (Economics, 2015).
Budget Deficit
Central Bank of Tunisia indicates that the government budget deficit in 2007 and 2008 stood at -3%. The figures however fluctuated between 2009-2011 with improvement in 2010 and a fall in 2009. The numbers are calculated using earlier budgets (of the preceding year).
Government Debt
Government debt to GDP showed a downward trend in the year 2007 to 2010 from about 45.9% to 40.2. In 2011, however, the debt shot to 43.9% as per the central bank of Tunisia and the World Bank (Economics, 2015).
Empirical Analysis of Determinants
The economic trends experienced by a country may be due to its economic crisis, or the crisis of other states passed to it (Oecd Publishing., 2009). Fall in GDP presents a negative economic impact that may be as a result of the rise in the cost of commodities or reduced total production. Tunisia faces an unemployment rate as an economic challenge with a fluctuating inflation rate and budget deficits (World Bank, 2015). Increased number of unemployment rates means that there is a rising number in the productive age, or those who are trained requiring the absorption in the economy. A negative growth in major contributors in the economy propels an adverse domestic product. This can also to raise the inflation rate that in turn lowers the standard of living. Increased demand and household consumption is core for any economic performance.
The graphs above show varied trends that can be related to different forms. We cannot compare the government debt to the budget as their pattern varies significantly. However, the GDP and the government debt have a proportionate relationship with an increase in GDP; the government debt falls. Budget deficit, however, is expected to contribute significantly to the national inflation rates, and therefore since GDP and the budget deficit can be related in this case, then it can be expected that an increase in GDP will help lower inflation rates.
Question Two
I would choose to deposit my cash in the Cypriot Bank.
Nominal interests take into account the expectations of inflation, inflation, on the other hand, that is the change in general price level is never constant (Francisco, 2015). Banks pay nominal interest rates on deposits unadjusted for inflation, as the theoretical interests tend to adjust to inflation or inflationary expectations, which, on the other hand, proceed to affect real interest rates. Real interest rate is estimated without the inflation expectation, and it accounts for the difference between the nominal interest rate and the inflationary expectations.
Given that nominal interest rate is an addition to the real interest rate and the inflation rate, the Cypriot bank will give a higher interest at 10% as compared to the Greece bank, which will give a nominal interest rate of 1% (Real Interest, 2+ Inflation rate, -1)(Francisco, 2015). Real interest rate however plays an essential role in the economy, in influencing the rate of demand for commodities through borrowing costs since it alters borrowing costs, availability of bank loans, foreign exchange rates, and the household wealth. When the inflation rate is zero, we expect the nominal interest rate and the real interest rate to be equal, but the bank will award higher nominal interest on positive inflationary expectations than negative expectation.
When the interest rates are, lower, either real or nominal, then it favors a borrower than a person who makes deposits to take advantage of the interest rates. In Cyprus, the interest rates are higher than in Greece due to their economic characteristics. In Greece, there is more borrowing expected than deposit as compared to Cyprus. In Cyprus, on the other hand, there will be more deposits than borrowing since the nominal interest rate will be at 10% as compared to that of Greece at 1% (2-1). People in Cyprus will tend to take advantage of higher interest rates offered by the bank and increase their saving behavior while minimizing borrowing as much as possible.
While making deposits to a bank, the focus is on the level of gains in terms of interest, mostly for a longer period, thus it is imperative to take into consideration the interest rates and the inflation rate and their impact on money. With higher inflation rates, money loses its purchasing power than on lower interest rates. In the Greece, the purchasing power of money is higher as compared to Cyprus, but by the end of the day, basing on the data, the real returns are still higher even with the high inflation rate. In the event there are no interest gains in terms of deposits to a bank, then it would be better making deposits in the Greece bank than the Cypriot bank, because the major factor of consideration will be the future purchasing power gain.
It is the wish of any lender, who defers money to another entity to recover enough to compensate for either inflationary trend or the foregone value. At a higher inflation, the real return or actual interest is lower than at low inflation, whereas at zero inflations over a period will give full returns in terms of interest (Francisco, 2015). In both the Greece and the Cypriot banks, the benefits are sufficient to compensate for the inflationary rate. In Cypriot bank, however, the inflation rate of the country is higher than that of the Greece; the real returns are still higher at 6% as compared to that of Greece at 2%. Out of the 10% nominal interest rate offered by the Cypriot bank, 4% will cover the inflation experience while there will be the 6% in real return for the money deposited.
Zero Interest Income Tax
Interest rates also affect bank deposits in terms of deductions and can be adjusted in terms of inflation. Interest income tax is deductible on the interest paid by the bank to the deposit, which in most cases is directly deducted, by the bank. In the event the interest rate is zero, it means investment returns will be higher since there will be no deductions in terms of tax. The consideration for the deposit will still be based on the inflation rate and the rate of real return from the different banks (Francisco, 2015). The primary factor will be which bank offers an interest rate that will give a higher rate of real interest.
It would still be favorable to deposit cash in the Cypriot bank more than the Greece bank, even though, the tax will have been exempted for interest incomes. Even as much as benefits in terms of zero tax will be enjoyed in both countries, the real returns in terms of interest gains are higher in Cyprus than it is in Greece.
Question Three
Calculating Consumer Price Index (CPI)
Consumer price index (CPI) is the most common method frequently used to measure the rate of inflation as it reflects price changes hence possible adjustments in the economy thus guiding in making economic decisions (Francisco, 2015). Governments to design policies and monitor the effectiveness of their economic agenda commonly use CPI. This is a more direct measure of calculating the living standards of a country and the economic trend. In this hypothetical economy, the goods and services being bought by a typical consumer is a computer and apples, which makes the consumer’s basket (Francisco, 2015).
The four-step process of computing CPI includes, defining the fixed basket of goods within the consumer’s basket, by identifying places which a typical consumer would spend cash in terms of products and services. The next step is establishing the price of goods in the fixed basket, as same fixed basket of goods is used over time to identify the changes in price. The third step is computing the prices of such goods over a defined period, finding the product of the goods and its cost. Finally, a base year is established and then the price of products and services for the fixed basket is computed dividing the price by that of the fixed basket of the established base year. The result is multiplied by 100 to present a relative cost of living over the years compared (Francisco, 2015).
In this case, the fixed basket of goods and services comprise of an apple and a computer, which are the only goods a typical consumer is purchasing in this economy. The price of a computer is 400 Euros while that of a kilogram of apple is 1 euro. It is essential then to calculate the cost of the fixed basket of goods for each period. These steps are displayed below in the numerical computation;
For 2007 (£400+£1) = £401
2008 (£500+£1.7) = £501.7
2009 (£550+£2.25) = £552.5
The next step is to establish the base year. Any year can be used as a base; in this case, 2007 will be used. Therefore;
CPI for 2008 = 501.7/401×100
= 125.11
CPI for 2009 = 552.5/401× 100
= 137.78
From the results, there is apositive trend in the CPI observable, and this can be pegged to the increasing price of the goods over the time. This indicates that there is increased cost of living from the year 2008 to 2009. Changes in the CPI depend on the changes in price of the goods in the consumer fixed basket. An increase in the price of goods would reflect an upward CPI while a decrease in the price of the goods in the consumer fixed basket would reflect reduction in CPI. CPI however only computes for the change in the cost of the goods and services thus the cost of living, but do not take into account the changes in the standard of living. Economic trends are much valued in this case then the value of life people would live period after period. Computing the changes in CPI or the percentage change in the cost of living would directly involve the deduction of the baseline-100. An upward trend or positive results reflect inflation whereas the downward trend or a negative result, which is a rare instance in the modern economies, reflects deflation in the economy.
CALCULATING GROSS DOMESTIC PRODUCT (GDP)
GDP can be calculated by computing the total price of the goods produced, in that case, the price of all the units of the commodity produced (Francisco, 2015). In 2007, the price per kilogram of apples was £1, in 2008 £1.7 while in 2009 the price was £2.5. The total quantity of apples produced by the economy was 2000 in 2007, 2500 in 2008 and 4000 in 2009.
The GDP therefore for the years are;
2007, 1 × 2000 = £2000
2008, 1.7 × 2500 = £4250
2009, 2.5 × 4000 = £10000
While calculating the inflation rate using the GDP deflator, a base year of which the comparison of GDP will be the base. We compute the real GDP using the base year prices with the current quantities, and, in this case;
2008 Real GDP = 2500 × = £ 2500
2009 Real GDP = 4000 × 1 =£4000
Nominal GDP that was calculated in the first instance took into account both the change in volume and price, whereas the real GDP only took into account the change in quantity of goods.
After finding the real and the nominal GDP, the GDP deflator can, therefore, be calculated, as the ratio of nominal GDP to real GDP minus one, multiplied by one hundred.
Therefore, for 2008; 4550/2500 – 1 = 0.82
0.82 × 100 = 82%
2009; 1000/4000 -1 = 1.5
1.5 × 100 = 150%
The deflator show how the price rose over the years and in the case the deflator is above 1; the country experienced inflation. This value of the deflator can also be used to represent the rates of inflation (Francisco, 2015).
Comparison of the Inflation Rates
As it can be seen, in 2008 using the CPI, the inflation rate was higher than that measured using GDP, whereas in 2009 the inflation rate using GDP was greater than that measured using CPI. It cannot be said that one give a higher inflation rate than the other, as from the results it can be realized that both of measures showed a lower or a higher rate than the other at different times. In ordinary cases, the rate of inflation computed by either of the methods is almost of similar value. The CPI method however assumes that the quantity of goods consumed remains constant while in actual sense it changes, while the deflator uses flexible basket of goods (amount of goods produced) with a regular price from the baseline.
The CPI captures more of the change in price than quantity, where a reduced consumption but a shoot in price would present an enormous inflation, as in the case of the hypothetical economy. Using deflator method in the same matter would offer a minimal inflation where the amount of product consumed highly reduced relatively higher (Francisco, 2015). The GDP underestimates the price change while overestimate the quantity while the consumer price index overestimates the price change while underestimating change in quantity; this thus contributes to the variation in the inflation rate using these methods