Lecture Notes: Productivity Measures

Types of Productivity Measures

Productivity measures are generally classified into three types:

1. Partial Productivity Measures (PPM)
2. Total Productivity Measures (TPM)
3. Total Factor Productivity Measures (TFP)

Partial Productivity Measures (PPM)

• Expressed as: Partial Productivity = Total Output / Individual Input
• Types of PPM:
  1. Labor Productivity: Total output divided by labor input (measured in man hours).
  2. Capital Productivity: Total output divided by capital input.
  3. Material Productivity: Total output divided by material input.
  4. Energy Productivity: Total output divided by energy input.
• Disadvantages:
  • Overemphasis on one input factor.
  • Other inputs might be underestimated or ignored.
  • Cannot represent overall productivity of the firm.

Total Productivity Measures (TPM)

• Based on all inputs
• Formula: Total Productivity = Total Tangible Output / Total Tangible Input
• Total Tangible Output includes:
  • Value of finished goods
  • Value of partial units
  • Dividends from securities
  • Interest and other income
• Total Tangible Input includes:
  • Value of human, material, capital, energy, and other inputs
• Features of TPM:
  1. Provides firm-level and detailed unit-level index.
  2. Helps in performance and productivity evaluation of operational units.
  3. Useful for planning, evaluating, and controlling.
  4. Important for strategic planners regarding expansion or phasing out decisions.
• Challenges:
  • Difficulty in obtaining data
  • Requires special data collection systems

Total Factor Productivity Measures (TFP)

• Formula: TFP = Net Output / (Labor + Capital Inputs)
• Uses a value-added approach
• Advantages:
  • Data from company records is relatively easy to obtain.
• Limitations:
  • No consideration for material and energy input.
  • Difficult to relate value-added approach to production efficiency.

Advantages and Limitations of Productivity Measures

• Partial Productivity Measure
  • Easy to understand and calculate
  • Useful for pinpointing improvements
  • Can be misleading if used alone
• Total Productivity Measure (TPM)
  • Provides a more accurate overall picture
  • Relates easily to total costs
  • Considers all quantifiable outputs and inputs
• Total Factor Productivity Measure (TFP)
  • Easier data acquisition
  • No consideration for material and energy inputs
  • Difficult in linking value-added approach to efficiency

Additional Notes

• Deflators:
  • Used to nullify the effect of changing prices from one year to another.
  • Deflator Value: Current Year Price / Deflator Base Year Price

The lecture emphasized understanding the different productivity measures, their applications, advantages, and limitations. It also covered the significance of using deflators in productivity measurement.