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Introduction
What is productivity, how is it measured and why is
it important? These questions are a useful starting
point from which we can define and explain the
range of productivity measures ONS produces.
Productivity is defined as the ratio between output and The term ‘living standards’ also covers the way the
input. Therefore increasing productivity means greater output of these goods and services is distributed within
efficiency in producing output of goods and services from a population. It is not just overall productivity of an
labour, capital, materials and any other necessary inputs. economy that is important but also how it varies across the
economy and across the people living in it. Therefore the
In practice, however, measuring productivity is one productivity of different geographical areas is important,
of the more difficult challenges in economic statistics. as is the productivity of different industries or types of
Users wanting a detailed discussion of the theoretical firms. Issues of regional productivity and productivity by
background and how best to approach the measurement industry are discussed in Chapter 11 and Chapter 8.
of productivity should use the Organisation for
Economic Co-operation and Development (OECD) The link between living standards and productivity
Productivity Manual. This ONS handbook instead is generally recognised and organisations aimed at
provides a practical approach for users so that readers improving living standards, such as the Centre for the
can gain an understanding of how UK productivity is Study of Living Standards in Canada, regard productivity
currently approached and measured. as the key to increasing living standards.
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The ONS Productivity Handbook Chapter 1: Introduction
types of input, including capital, labour and raw materials. 1.2.1 Output
In practice, measuring productivity means measuring the Productivity estimates tend to use one of three different
outputs and inputs of an economic unit, for instance a measures of output:
sector, industry or firm. 1. total output
Changes in output can be achieved by adding more 2. gross value added (GVA)
inputs, or by changing the relationships between inputs 3. gross domestic product (GDP)
and outputs (in economic terms this means a shift in the
production function). Productivity growth occurs through One potential source of confusion is the term ‘gross’.
improved efficiency, such as using fewer inputs to produce GVA and GDP are net of inputs used, meaning that they
the same outputs, or through inputs being used more equal the value of production less the value of inputs.
effectively to produce outputs of greater value. Put another way, they measure the value added to inputs
during the course of production. GVA and GDP are,
Productivity analysis is not confined to the economy as therefore, both value-added measures. The difference
a whole (macroeconomics). The practice also takes place between them relates to the price valuation used, as
in firms and other organisations (microeconomics) that explained later. GVA and GDP are ‘gross’ in the sense that
conduct sophisticated analysis of their own operations. they are gross of the depreciation of capital assets. A fuller
For productivity statistics to show dependable trends explanation of these concepts is given below.
over time, they need to be produced from consistent The choice between which output measure to use is
measures of outputs and inputs. This means that the mainly determined by what types of input are included in
output estimates used must be consistent with the whole the productivity calculation, as will be explained later.
economy measures available from the National Accounts.
Input estimates should be consistent with UK population 1.2.1.1 Total output
and employment figures. Additionally input and output
Total output, or output, is the value of the goods and
measures should be consistent with each other. Obtaining
services produced. It is broadly equal to the value of the
consistent measures of output and input is one of the
sales plus any increase (and less any decrease) in the
main challenges in estimating productivity, which has both
value of the inventory of finished goods not sold and
conceptual and measurement aspects. This is discussed
work in progress.
in detail in Chapter 5. However, before considering
consistency, there is the question of what outputs and
1.2.1.2 Gross value added
inputs actually are.
GVA is the difference between total output and
intermediate consumption for any given sector or
industry. That is the difference between the value of
goods and services produced and the cost of raw
materials and other inputs that are used up in production.
Therefore, GVA can be simply related to total output:
The National Accounts are a set of current values, volume
GVA = total output - intermediate consumption
measures and volume indices which, together, summarise all
the economic activity of a nation. This can be defined as a central
framework for the presentation and measurement of the stocks Intermediate consumption is the cost of raw materials and other
and flows within the economy. In the UK this framework provides inputs that are used up in the production process.
many key economic statistics including gross domestic product
(GDP) and gross national income (GNI) as well as information
on, for example, saving, disposable income and investment.
1.2.1.3 Gross domestic product
A volume measure is a quantity describing the number of units GDP measures the total economic activity and, like
produced. For instance, if you spend £100 on items that cost £10 GVA, is ‘gross’ in that capital consumption (loosely
each, expenditure is £100 and the volume measure is 10 (£100/
defined as depreciation of fixed assets) is not offset
£10 = 10).
from production.
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Chapter 1: Introduction The ONS Productivity Handbook
GDP can be measured in three ways: More information about choosing deflators and related
1. production (GDP(P)) – as the sum of all the gross issues is given in Chapter 4.
value added by all producers in the economy
1.2.1.5 Using output in productivity estimates
2. income (GDP(I)) – as the total of the income generated
The output used when generating productivity estimates
through this productive activity
should, in theoretical terms, be either total output or GVA.
3. expenditure (GDP(E)) – as the expenditure on goods The choice of which one to use is based on whether the
and services produced productivity measure being created relates only to primary
In principle, these three estimates must yield the same inputs (such as labour and capital) or also to intermediate
answer in the absence of errors and omissions. In practice, inputs (such as materials, energy and business services).
measurement limitations mean that these approaches Generally speaking, when only primary inputs are
produce different figures that must be reconciled to involved then GVA should be used as this does not include
produce a single estimate of GDP. intermediate consumption. However, when intermediate
inputs are included then total output should be used as it
As already noted, the difference between GVA and GDP
does include these inputs.
concerns the price valuation. GVA is measured at what
are known as basic prices while GDP is measured at prices It is important to remember, however, that data suitability
including taxes. can mean rejecting a theoretically preferred approach.
For example, it is difficult to get suitable total output data
GDP and GVA are related in the following way: at the industry level. There is more about the different
GDP = GVA + taxes on products - subsidies on products outputs in Chapter 4. Inputs are defined and considered
below, and discussed in more detail in Chapter 5.
GDP is a key indicator of the economy and one of the
most commonly used measures of output. 1.2.2 Input
■ GDP (and GVA) are measured consistently across many Input can be measured in a variety of different ways. For
countries following the definitions given in the System example, labour input can be measured as number of jobs,
of National Accounts 1993 (SNA93) and the European workers or hours worked. There are also other forms of
System of Accounts 1995 (ESA95) input such as capital and raw materials. It is usually the
■ GDP per head is a key indicator of the state of the choice of input that indicates the type of productivity
economy and there are advantages to producing measure. For example, output per unit of labour input
comparable productivity measures is usually referred to as labour productivity. Inputs are
sometimes referred to as ‘factors of production’. More
■ GDP is used for producing International Comparisons
details are provided in Chapter 5.
of Productivity because purchasing power parities
(PPP), which are also used, relate to GDP rather than
1.2.3 Productivity levels and growth rates
GVA or total output (see above)
What is often referred to as the productivity level is really
GDP, total output and GVA are all measured in the a ratio (output divided by input), usually expressed as an
National Accounts and are described in greater detail, index number with base equal to 100 in a chosen year.
along with the links between them, in Chapter 4. However, while these levels can be interesting measures
in their own right, the focus is usually on the change in
1.2.1.4 Deflators productivity over time, that is, how much more or less
When measuring output over a time period, it is essential productive the economy (or region or industry) has
to remove any increase in the value of output caused become within a certain period.
by inflation: to understand either changes in welfare The simplest form of growth in a year (or quarter) to
or changes in efficiency, output should be measured express in an equation is given below.
in volume or real terms. Therefore, when producing
productivity estimates, suitable price indices are required Growth per annum = Productivity in year t
to deflate output, GDP or GVA. Productivity in year t-1
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The ONS Productivity Handbook Chapter 1: Introduction
Within this equation a growth rate is shown in the form This approximate relationship is explained in greater
of the multiplier from the previous year. For example a detail in Box 1.1.
multiplier of 1.02 would represent an increase of 2 per cent.
1.3 Measures of productivity
This in turn can be shown as output and input changes:
Whether productivity is observed as a growth rate or
= Output in year t ÷ Input in year t a level, the general term still covers a wide range of
Output in year t-1 Input in year t-1 measures. These measures are individually defined and
named for the types of input and output data they are
where, again, the multipliers would be of the same constructed from. The two most well-known productivity
form (for example, 1.03 for output and 1.01 for input). measures are labour productivity and multi-factor
Therefore growth in productivity equals growth in output productivity. These two measures and various less-known
divided by growth in input. measures are described in greater detail below.
However, productivity measures are most often
published as annual (or quarterly) percentage growth 1.3.1 Labour productivity
rates. These published percentage rates can be roughly Labour productivity is output per unit of labour input.
related to output and input percentage growth rates: There are various different ways of measuring labour
input, such as jobs, workers or hours worked. A labour
Productivity % growth rate ≈ Output % growth rate productivity data series effectively shows changes in output
- Input % growth rate over time for the same value or amount of labour input.
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Chapter 1: Introduction The ONS Productivity Handbook
of living standards: income per person in an economy or per hour worked. However, because of multiple job
varies directly with one measure of labour productivity, holders it is regarded as the least informative measure of the
value added per hour worked. In this sense, measuring three. An increase in the number of jobs may simply reflect
labour productivity helps to better understand the a move to job sharing rather than any change in the amount
development of living standards (OECD, 2006). of labour input required to produce output.
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The ONS Productivity Handbook Chapter 1: Introduction
Where:
Employment workplace is the number of jobs by place of employment.
Labour force workplace is the number of workers by place of employment.
Labour force residence is the number of workers by place of residence.
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Chapter 1: Introduction The ONS Productivity Handbook
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The ONS Productivity Handbook Chapter 1: Introduction
2. Also called GDP per capita – this is not usually regarded as a productivity measure but as an indicator of welfare.
1.5 References
The Centre for the Study of Living Standards, Canada,
available at: www.csls.ca/
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Chapter 1: Introduction The ONS Productivity Handbook
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