The Effects of Increased Productivity on GDP

Productivity in large industry affects the overall economy and GDP.
Productivity in large industry affects the overall economy and GDP. (Image: Hemera Technologies/ Images)

Increased productivity has an overall positive effect on the GDP, or gross domestic product. For example, a massive improvement in small-scale productivity through small business may greatly improve the personal finances of individual employees and perhaps even the local economy; however, large companies can have a more far-reaching impact through seemingly minute policy changes that may in reality have a greater impact on the GDP simply because of the vastly differing scale.

The Concept of GDP Demystified

The GDP, or gross domestic product, is an economic term that refers to “the total market values of goods and services produced by workers and capital within a nation's borders during a given period,” according to Princeton University WordNet. It is important to note that capital growth – such as investment profits – is a factor, rather than simply the output of tangible material goods. Distilled to its simplest meaning, it is simply the measure of the health of a national economy.

Gap Between Reported GDP and True National Productivity

The GDP and the actual productivity of a nation as a whole do not always add up. Capital growth also factors into the GDP, making the GDP alone a somewhat biased indicator. Ephemeral gains made via the stock market can easily evaporate if stocks are overvalued. Given the volatility of the stock market investments in the post 2000 recession era, manufacturing, employment, and agricultural output data is more valuable when taking the pulse of the national economy.

Impact of Increased Small Scale Productivity on Local Economies

A productivity increase in a single business can dramatically boost the local economy, particularly in smaller towns. Some towns are even built around productivity surges in a single industry, especially where resource extraction or large-scale factory production is present. Increased worker productivity translates to higher profits and ultimately more taxes for local government to build public infrastructure. Better public infrastructure, such as roads, utilities, schools, libraries and municipal fitness or recreation facilities serve to improve the overall local standard of living. Beyond the contribution to the local government, workers that are more productive may see increases in pay as the company they work for rises in status, which translates to bigger homes, vehicles and disposable income. Productivity on the local economic level is well within the scope of control of individual businesses, and to some extent workers themselves. Local scale improvements to productivity have a very small impact on the overall GDP, but are still valuable as they increase disposable income and demand for goods, which is the ultimate driver of an economy.

Increased Productivity on the National Level

On the national level, the subtle productivity increases of individual companies usually go unnoticed, with the notable exception of a handful of large multinational corporations. When massive companies such as automobile manufacturers struggle, the consequences often spread nationally due to the interconnection of multiple plants and the reliance of resource extraction sub-economies on these large-scale producers. Increased productivity on the national level means growth for all industries, disposable incomes and the general quality of life; unfortunately, given the deeply complex host of variables that control national productivity, it can be difficult for individuals to have a positive impact. Tangible industrial productivity boosts the GDP.

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