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Productivity and Economic Policy Objectives

Economics (Year 12) - Productivity

Christian Bien

Recap of the Effects of Productivity Growth

Increasing productivity, increases the output of goods and services of an economy, as the same amount of inputs can be used to generate higher output. This will increase aggregate supply from AS1 to AS 2. This will increase economic growth from Y1 to Y2 and lower unemployment. In addition, price levels will decrease from P1 to P2.

Sustainable Economic Growth

Increasing productivity meets the objective of sustainable economic growth as rises in economic growth also result in lower price levels, an ideal position of the economy. Economic growth can continue to rise if it does not pose any increases to inflation.

Price Stability

The economic policy objective of price stability is met as price levels fall from P1 to P2 as a result of increasing productivity. Prices fall towards an inflation band of 2-3%.

Full Employment

The economic objective of full employment is met as increases in economic growth will also increase employment. Lower unemployment is in line with the Non-Accelerating Inflationary Rate of Unemployment (NAIRU) as the lower unemployment rate does not increase inflationary pressure in the economy.

Equitable Income Distribution

With more people employed, the gap between the unemployed and employed decreases, increasing income equality. Lower inflation also positions goods and services to still remain accessible to low-income earners. Although, it is likely that economic growth is uneven and some sectors may experience a decline. Productivity growth could arise from new technology that displaces workers, increasing the gap between those structurally unemployed and those who are employed.

Resource Allocation

Productivity growth means that resources are being used more efficiently and intensely increasing resource allocation. Resources such as labour, experience capital deepening, increasing the efficiency of labour resources that enable a higher output to be achieved.

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