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Study Notes

Productivity Growth and Human Development

AQA, Edexcel, OCR, IB

Last updated 21 Mar 2021

To what extent is higher productivity important for a country wanting to make significant improvements in their Human Development Index rankings?

Productivity is a measure of the efficiency of factors of production for example measured by output per person employed or the value of output per hour.

In the long run, productivity is a major determinant of economic growth and also of inflation.

A fall in labour productivity leads to a rise in firms’ (unit) costs of production (assuming that the level of wages remains the same)

Higher productivity allows businesses to pay higher wages and achieve increased profits at the same time.

So progress in lifting labour and capital productivity will be important for lower and middle income countries who wish to increase their absolute human development index scores and also their relative position in the rankings.

Countries with high productivity as measured by the value of output per worker employed are normally near the top of global rankings for the world’s richest countries.

However, this does not necessarily translate into the highest values for the Human Development Index. Qatar, Kuwait and Saudi Arabia for example are all outside the top 30 nations using the 2015 HDI report. Remember that the HDI includes real GNI per capita as a category with a one-third weighting, but that education and health outcomes have equal importance.

If the gains from productivity improvements are unevenly distributed among the population then a country's inequality-adjusted HDI scores will also suffer.

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