The financial encyclopedia uses cookies to improve your user experience. Find out more here!






A measure of the rate at which output flows from the use of given amounts of factors of production. If factors are being used inefficiently, there will be scope for productivity improvements, since by definition more output can be produced from the given amounts of inputs. In practice, productivity is usually measured by expressing output as a ratio to a selected input. The input selected will give its name to the productivity measure, e.g. labour productivity is the ratio of output to labour input (and is therefore the same thing as the average product of labour). Some care must be taken in making efficiency comparisons across firms, industries or countries on the basis of only one productivity measure, since differing technological conditions or relative input prices may mean that different productivities of specific inputs are quite consistent with efficiency. For example, a country in which labour is abundant and cheap, such as India, will have lower labour productivity in its agriculture than a country such as the U.S.A., where labour is relatively scarce, because it is economically efficient to use more labour-intensive production methods in India. Similarly, when comparing industries, the electricity industry will have higher labour productivity and lower capital productivity than the automobile industry, because electricity-generation technology is inherently more capital-intensive. Serious attempts to assess the efficiency of firms, industries or entire economies require a more fundamental procedure than the mere comparison of specific productivity measures.

Reference: The Penguin Dictionary of Economics, 3rd edt.