Structural Change & Productivity

What is the relationship between structural change and economic growth?

Economic growth leads to a rise in material living standards that will lead to structural change due to changes in customer presences.Structural change leads to maintenance of an efficient allocation of resources (productivity) that leads to economic growth.

Capital widenin'g

when extra capital is used with an increased amount of labour, but the ratio of capital per worker does not change (usually, total production will rise while productivity remains unchanged)

Capital widening

when the capital stock grows at the same rate as the labour force, so that the capital-labour ratio remains constant

What are causes of productivity growth? (CETCO)

- Capital deepening, especially through investment in capital and infrastructure; - Improvements in the quality of workforce, especially through investment in human capital (i.e. Education and skills training); - Improvements in technology, especially through innovation (e.g. Product, process and organisational) and R&D; - Improvements in enterprise; and - Greater competition (which incentivises innovation, specialisation and allocative efficiency).

What are some causes of structural change? (SITAE)

- Changing societal factors (e.g. Household structures and life expectancy); - Changing average incomes; - Technological change and innovation; - Microeconomic reform; - The emergence of major producers of industrialised goods in East and South East Asia and other exposure to international competition; - Changes in the level of education and skills training; - Changing consumer preferences;

Relationships between productivity and the government's major economic objectives

- Positively related to sustainable EG; - Positively related to price stability; - Uncertain how it affects full employment; - Positively related to the efficient allocation of resources; and - Indeterminate effect on the equitable redistribution of income.

What are some of the effects of structural change

1) Higher Structural Unemployment in the short term because the nature of some industries becoming obsolete over time and becoming less

Capital deepening

A situation where the capital per worker is increasing

How does an increase in productivity effect inflation?

Higher productivity leads to decreased productions costs that flow through to product prices and thereby reduce inflation.

How does techological change cause structural change?

Increased technology levels tend to lead to improved transportation and communication techniques (through improved speed and cost efficiency), which drive the globalisation of markets and expose firms to more competition.

How does an increase in productivity effect economic growth?

Increases in productivity allow firms to produce greater output for the same level of input, earn higher revenues, and ultimately generate higher GDP.

Define structural change?

Involves the adjustments in the composition and location of production and employment in an economy over time.

What is labour productivity?

The efficiency with which people or firms convert productive inputs of labour into outputs of goods and services.

What is productivity?

The efficiency with which people or firms convert productive resources into outputs of goods and services.

How do changing incomes cause structural change?

The higher the levels of income, the greater the demand for discretionary/durable products, which become more affordable. Demand for inferior goods will also decline in such a scenario.

What is Labour market reform?

The process whereby the labour market is amended, especially in order to promote productivity.

What is the link between productivity and economic growth?

Through an AD/AS model, productivity shifts the SRAS to the right as well as increasing LRAS simultaneously as output increases as workers are more productive. The increased level of aggregate supply will increase incomes and population, increasing AD to the right. Real GDP will increase while inflation will remain relatively the same.

MFP formula

Value of output (or GDP) / (labour hours + capital inputs).

LP formula

Value of output (or GDP) / total labour hours worked.

Ways in which the government can promote productivity growth? (LETTR)

By implementing policies that promote productivity-enhancing changes, reduce barriers to productivity growth or facilitate the improvements in productive efficiency through processes such as: - Labour market reform; - Education and training policy; - Taxation reform; - Trade liberalisation; and - R&D and innovation;

What are the benefits of productivtiy growth (WPPE)

1) Higher wages: Productivity growth enables firms to increase wages for workers. Unit labour costs (ULCs), which measure the labour costs associated with producing one unit of output, decrease as labour productivity increases, meaning that firms can offset the effect of wage increases on profits with productivity improvements. 2) Lower prices: Businesses can pass on productivity improvements to consumers through lower prices without reducing profits or wages. This also makes Australian businesses more competitive in global markets. 3) Higher profits: In response to an improvement in productivity, businesses can increase their profits as it now costs less to produce a given level of output. These profits can be distributed to the business owners or shareholders, or reinvested into the firm. 4) Stronger economic growth: Labour and capital inputs tend to be subject to diminishing marginal returns. In other words, holding other inputs constant, the addition of one more unit of labour or capital will lead to a smaller and smaller addition to output. This leaves productivity growth as the main driver of higher living standards in the long run.

What is the purpose for the Government's role in promoting productivity?

1) Market orientated: Create conditions, where appropriate, that allow markets to work efficiently or fix up government failure. 2) Interventionist: Provide public and merit goods and, where appropriate, regulate to prevent or fix up market failure.

Types of Efficiency (PAD)

1) Productive/technical (occurs when resources are allocated to their best use, such that no more units of one product could be produced without sacrificing units of another product); 2) Allocative (occurs when resources are allocated according to consumer preferences); and 3) Dynamic (the productive efficiency of firms over a period of time).