Answer to Question #112301 in Macroeconomics for Srishti

Question

Evaluate the importance of productivity for the rate of economics growth

Hint includes - Actual growth, potential growth, AS/AD diagrams.

Economics A level (this is a 20 marker)

Answer 1

Importance of productivity for the rate of economic growth.

Productivity is the efficiency whereby an economy or a company transform resources into goods. i.e creating more from less.  Increased productivity means greater output from the same amount of input. The following are the importance of productivity for the growth of the economy:

1. Productivity in the economy improves living standards of the people involved. This is because they are able to get quality products due to higher output level, also because the businesses are making profits, the employees are able to be compensated and also payed in time hence have money to cater for their needs.Their living standards are raised through productivity.
2. Productivity enables government to raise more taxes from the businesses. Due to higher productivity, the amount of money payed by businesses also increases enabling the government to get more fund which they can in turn use to improve the infrastructure and other important services to the business community
3. Through high productivity, also the businesses are able to benefit because they are able to raise more profits because their outputs are high and they are using less inputs.Therefore they are able to compensate their employees in time. They are also able to get more working capital to improve the business. The business will also be able to improve competitive capacity.
4. Higher productivity will also increase power of the economy through boosting economic growth and also being able to satisfy needs of the consumers. Increased GDP and outputs wiill improve economic growth.

Aggregate demand and supply diagrams.

Aggregate demand is the total amount of goods that are purchased at all price levels where as aggregate supply is the total amount of goods and services that a company or business are willing to sell at a given price in the economy. Aggregate supply and aggregate demand are graphed together to determine equilibrium. The equilibrium is the point where supply and demand meet to determine the output of a good or service.

An outward shift in the AS curve will result into decrease in prices and an increase in output produced.O the other hand, an outward shift in AD curve will result into increase in prices and decrease in output levels in the economy.

An increase in money will result to an increase in production due to shift in AS .More goods and services are produced because output is high and also more goods and services are sold because the prices are low.