The Concept Of Productivity Economics Essay

Productivity has become cant of our times. It is interesting that despite so much concern about productiveness there is no universally accepted definition of what productiveness is, that is there is no individual set of definition which a concern or authorities bureau can utilize to mensurate its productiveness but everyone is certain of one thing, the higher the productiveness, the better it is. I.G. Smith has justly pointed out that “ Productivity is a hard topic for both pupil and practician, hard in footings of definition, measuring and effort to accomplish an addition. At present, the topic of productiveness and its measuring is characterized by excessively many loose terminals and a great trade of confusion ” . Shocked and confused by worsening rate of productiveness, assorted houses and authoritiess are seeking for reply and action. Action nevertheless requires apprehension of the issues and constructs. Productivity as a phenomenon has non merely been studied by economic experts but besides by direction scientists. Economists have attempted to steps productiveness and gauge its impact on end product and growing.Rostas ‘s book ‘Comparative Productivity in British and American Industry ‘ , which appeared in 1948 constituted a innovator work in this field. Management experts like F.W. Taylor and Mc Gregor developed certain techniques and theories in order to heighten productiveness of workers and other employees.

In fact, different definitions are used in different state of affairss. The ground for this is that some of the inquiries associating to productiveness are best answered with one sort of productiveness measuring and other with another sort. Peoples in countries such as accounting, economic sciences, technology and Industrial/organizational psychological science interpret productiveness in different ways. Productivity is reflected in the relationship between end product of goods manufactured or service rendered and input of production resources used in providing such end product. The most common expression showing productiveness is:

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Productivity= Total Output/ Total Input

Productivity, as understood in common idiom, measures the output-input ratio. That is, it measures the end product per unit of input employed. Productivity is by and large interpreted as efficiency of industrial production, to be measured by some relationship of end products to inputs. Productivity is reflected in the relationship between end product of goods manufactured or services rendered and input of production resources used in providing such end product ( Srivastava T.N and A.K.Sharma, 1984 ) .

Many similar definitions have been given by different writers. One such definition is, “ Productivity is the mean sum of goods and services produced by a unit of a productive factor in a specified period of clip ” ( Beri G.C, 1952 ) .It is the relationship between a flow of end product produced and the things which are used to accomplish that flow of end product ( Silver, M.S, 1984 ) . A comprehensive definition of productiveness is “ the ratio of valuable end product to input, i.e. the efficiency and effectivity with which resources-personnel, machines, stuffs, installations, capital, time-are utilised to bring forth a valuable end product ” ( Ranjit, 1978 ) .According to Kopleman, possibly the most widely recognized definition of productiveness is the physical procedure conceptualisation used by many economic experts. He said that “ Productivity is the relationship between physical end product and one or more of the associated physical input used in production. When individual input is used to mensurate productiveness, it is called ‘factor productiveness ‘ and when all factors are combined together for the intent, it is known as ‘total factor productiveness ‘ Broadly conceived it is a systems construct, it can use to assorted entities, runing from Individual or machine to a company, Industry or national economic system ” .

So, productiveness is the ratio of end product to input. This definition applies in an endeavor, an Industry or an economic system as a whole. Put in simpler footings, productiveness, in the sense in which the word is used here is nil more than the arithmetical ratio between the sum produced and the sum of any resources used in the class of production. However, there is instead clear credence of the fact that productiveness should be thought of as the ratio concept the ratio of the end product of goods and services produced or generated by an organisation divided by the input used to bring forth them ( Hinricks, R.Johan, 1978 ) .

As summarized by the Encyclopedia Britannica, “ Productivity in economic science is the ratio of what is produced to what is required to bring forth it. Normally this ratio is in the signifier of an norm, showing the entire end product of some class of goods divided by the entire inputs of, say, labour or natural stuffs. In rule, any input can be used in the denominator of the productiveness ratio. Therefore one can talk of the productiveness of land, labor, capital or sub-categories of any of these factors of production ( 1974, edition ) .

Productivity and Efficiency

Productivity is a critical index of economic public presentation of an economic system. In more matter-of-fact footings, it is a premier determiner of economic well being. It affects occupation creative activities, the rate of rising prices, and the balance of payments and possibly most significantly, determines future economic development ( Ostry and Rao, 1978 ) . It is good known that economic growing, as a mean to heightening the public assistance of people, depends both on the usage of factors of production such as capital and labor, and the efficiency in resources use, frequently termed as productiveness. Recent development indicates the turning importance of productiveness, peculiarly for our economic system at its present phase of development. A productive economic system of bring forthing goods and services is necessary for productiveness growing, higher criterion of life of people, and national wellbeing. A state ‘s productiveness is unimpeachably regarded as one of the two major findings of the ways of lize of its people, the other being its socio-political system. The higher productiveness would profit each and every single irrespective of whether he works for himself, or a little or a big organized Industry in public or private sector and this in bend would proclaim national prosperity. As such higher productiveness is a affair of great national Importance.

“ Productivity refers to a mensurable relationship between well- defined end products and inputs, that is, between the production consequences and the comparative production agents, in both the fiscal and physical footings, in relation to given clip and conditions. If a given end product improves quantitatively and/ or qualitatively against the same cost or per unit of the same input or sets of inputs, we say that productiveness of inputs or of the works or of the industry or of the part and national economic system concerned have improved. ” ( Lal, B.B. , 1965 ) . As per the above given definition productiveness may be measured at assorted degrees viz. works degree, industrial degree and national degree. It is by and large defined in footings of the efficiency with which input are transformed into utile end product within the production procedure. The ratio of productiveness refers to a comparing between the quality of goods and services produced and the quality of resources employed in turning out of these goods and services. It expresses the volume of goods and services produced in footings of the measures of input required to bring forth them. Productivity additions emerge from betterments in the techniques, engineering and direction of the production procedure. These betterments consequences in higher production and lower costs. High per capita incomes of developed states reflect higher degree of productiveness. In simple linguistic communication, higher productiveness means prosperity: it means to bring forth more and more end product from less and less input and can be measured as the ratio of end product to input.Low and stagnating per capita incomes in developing states evidently reflect low degree of productive capableness. In other words, productiveness is the combination of effectivity and efficiency. Standard of life of the people every bit good as the prosperity of a state all are influenced by the degree of efficiency of different Bankss in that state. Raising efficiency means doing more effectual usage of resources.It means bring forthing more goods and services with no greater usage of resources or keeping the same degree of production utilizing fewer resources. When with the given resources, we produce more goods and services and in term of end product the production is more, we can state that the productiveness has increased. It is by and large defined in term of the efficiency with which input are transformed into utile end product within the production procedure every bit good as end product is produced by the resources utilized. Increase productiveness enables the enlargement of gross revenues to other states permits specialisation and economic of graduated table beyond the range afforded by domestic markets. This improves the criterion of life which is the end of all states.

Considerable confusion exists about the reading of and relationship between the footings ‘efficiency ‘ and ‘productivity ‘ . ‘Efficiency ‘ is ability of an person or organisation to bring forth the coveted consequence with lower limit of attempts, disbursals and wastes. Efficiency, in simple words, means ability to accomplish the concern aims in the best and cheapest manner. A differentiation must besides be drawn between proficient efficiency and economic efficiency. Technical efficiency may associate to one production factor or a production unit, whereas economic efficiency is a wider construct. Technical efficiency implies that the works ‘s proficient operations are continuing swimmingly, and economic efficiency that the project is working every bit desired from economic point of position. The chief Endeavour of an endeavor is to accomplish the greatest possible proficient efficiency which, in bend, should be low-level to the projects endeavor to accomplish the greatest possible economic efficiency. Therefore, in the present context, ‘ efficiency ‘ is used to denote overall efficiency which is of primary importance to the project under survey.

It is possible to place certain factors act uponing efficiency e.g. efficiency of workss is influenced by operating and non-operating costs, productiveness of assorted resources used etc. therefore we see that ‘efficiency ‘ is a wide term, productiveness is merely a yardstick of efficiency. Productivity is nevertheless, defined as “ ratio of end product and input ” . The ratio of productiveness refers to a comparing between the measure of resources employed in turning out of these goods and services. This ratio besides indicated the grade of efficiency with which production resources are converted into goods and services. The higher the ratio the greater the productiveness, the better it is. Productivity aims at executing this transition efficiency and it generates economic additions many times more than the cost of attempts put into rise productiveness. It can be done by increasing the value of end product or cut downing the cost of inputs. End product may be goods produced or services performed to run into the demands of the people.Inputs chiefly involve human labor and capital. Since effectual and optimal use of capital and human resources are of import aims of a house, their productiveness is measured and used to bespeak “ operational efficiency ” of the concern- productiveness, hence, is an of import standard of mensurating “ operational efficiency ” ( Agarwal, M.D.,1987 ) .

Concept of Productivity in Banking

In its simplest term, productiveness efforts to compare in existent footings the measure of goods and services provide against the measure of resources employed in a given period of clip. The measuring of productiveness involves mensurating end product and inputs. The construct and definition of productiveness as applied in fabricating Industries can non be applied in banking Industry which is primary a service Industry. The job of productiveness is compounded when more than one step of end product or input is available. This is true in banking. Banks provides varied services like credence of sedimentations, extension of recognition, remittal of founds, aggregation bureaus, behavior of foreign exchange concern, supplying a safe detention and so on. etc. and this is a multi merchandise services Industry. This makes designation of end product really hard.

Furthermore, in instance services Industry like banking, the end product are non homogeneous, the services offered are excessively many. The measuring of end product does non show any trouble so long as end product is homogeneous, as in instance of industries. It may be measured in footings of physical footings or in value footings. In instance of heterogenous merchandises like labor, capital, stuff etc. this makes the designation and measuring of end product more hard. Its end product comprises non simply of any physical merchandise whose belongingss could be analyzed in a research lab and whose production could be quantified easy, but of a ‘bundle of services ‘ non easy to mensurate. It is besides hard to find the efficient sum of resources required to bring forth services outputs.

Each service provided by Bankss once more requires different accomplishment. Measuring the productiveness of service sector requires techniques that are more sensitive. Output a service Industry is the service rendered to clients, whether the client satisfied from the services or non is externally hard to mensurate because of the subjectively involved.

This farther complicates the jobs when a nationalized bank in India operates for big no. of non-economic aims besides. It poses many conceptual and measurement jobs frequently, productiveness and profitableness have been used in most of the banking surveies in the same sense. But profitableness is the merchandise of productiveness and monetary value recovery ( Kremin, 1982 ) . As compared to profitableness, the volume of concern at both micro and macro degree has become more of import representative of productiveness. This statement is based on several points:

Banks perform diversified maps other than merely credence of sedimentations and loaning progresss ;

Net income is capable to fluctuation due to a assortment of causes ; and

A big portion of the populace sector bank is engaged in what we may term as a societal banking.

It enabled service Industry like banking to avoid the inquiry of productiveness for a long clip. However, as the economic grow the importance of service and district sector addition, doing it hard to disregard its efficiency and productiveness. Furthermore, being an of import economic activity, it can non afford to lose sight of the construct of the productiveness. In a service Industry, holding multiple dimensions, it is ineffectual to measure productiveness of end product generated as a consequence of employment of manpower merely. Productivity is a map of so many factors like the quality of direction which pertains to manpower every bit good as other factors like the general fiscal wellness and conditions of a bank, external environment, internal policies and processs in assorted countries like usage of work force and stuff. All these facets among them straight influence cost effectivity or productiveness.

Some illustrations are deserving observing to exemplify the cost effectivity of banking operations. Take the instance of work force. There are two options, viz. either to use more people for a given map at low payout per capita or to use a fewer figure at higher payout. The understanding with the staff brotherhoods enumerates in item the work allotments to different sections of bank employees belonging to present staff and prescribes wage and allowance for them. Similarly the understanding entered into between direction and the officers associations describes intricately the classification of subdivisions on the footing of volume of concern and the officers put in different classs based on the footing of volume of concern and the officers put in different classs based on their ranks. The lower pay-out and more staff reflect low capital and high labor strength whereas higher pay-out indicates low labors and high capital strength. Situations of lower payout per capital indicate lower degree of engineering and cybernation instead than differences in accomplishments and instruction of the employees.

The turning importance of volume of concern is besides recognized in advanced states. Bing a multi-product service industry, no individual step of productiveness is possible. Hence a set index will hold to be used. With this attack in the head productiveness may be studied with inputs identified as capital, labor, figure of subdivisions and other inputs. The ratio of assorted concern parametric quantities and runing consequences with identified input will mensurate productiveness. For illustration sedimentations, recognition concern, entire income, entire outgo, spread and establishment outgo per employee may be taken as to mensurate labour productiveness. In the same manner, the subdivision productiveness can be arrived at. Productivity in footings of volume of concern does non supply equal weight to facets like subdivision web and the population group concentrations or constellations every bit good as constitution cost as a ratio of concern generated. The degree of concern as a ratio of constitution cost is a important ratio that will bespeak the effectivity of utilizing human resources in bring forthing concern. It may be noted, that Bankss that have been able to keep uninterrupted growing and profitableness every bit good as strength of balance sheet have been able to enter better ratios of manpower effectivity. Most significantly, nevertheless, mensurating operational efficiency utilizing measures may enable us to understand what precisely underlines differences in fiscal public presentation. It is a difference in proficient efficiency, that is, the maximal end product that can be realized from a given Input or there difference in allocative efficiency, which reflects the ability or houses to utilize inputs in optimum proportion, given the monetary values.

The conceptual and empirical jobs that plague the measuring of physical end product in most service industries are peculiarly acute in the banking sector, where there is no clear consensus on an appropriate definition of end product ( Triplett 1990 ) . For illustration, since Bankss engage in intermediation, are their sedimentations to be measured as an input or an end product? In a service industry like banking, the merchandises include sedimentation raised, resources deployed as recognition and investing, as besides the services rendered to the depositors, borrowers and others who utilize banking services for warrants, letters of recognition, foreign exchange remittals, bill of exchanges, traveller checks, recognition cards, pension payments and publish direction. While it is non possible to convey all the assorted services to mensurate end product, bank balance sheets provide distinguishable information that can be accepted for end product measuring. At present, Bankss steps productivity as a ratio of manpower to concern volume, viz. deposits plus progresss. The end point ratio nevertheless does non reflect to the full the broad scope of services delivered by the Bankss. The most common response to this job examines indexs of productiveness in the banking sector that are by and large derived from accounting informations.

The rational for these accounting indexs is that productiveness betterments, including the productiveness of non-labor inputs, should intend that a lower degree of costs or employment is required to pull off a given degree of assets, or to bring forth a given degree of income. However, these ratios can be interpreted more right as mensurating the Bankss efficiency mark instead than straight mensurating their productiveness. However, such steps of efficiency are most normally examined indexs of productiveness in Bankss. Consequently, efficiency constructs will be used for analysis in this work.

Concepts of efficiency relate to how good a bank employs its resources relative to the bing production possibilities frontier ( or, in other words, comparative to current ‘best pattern ‘ ) ; how an establishment at the same time minimizes costs and maximizes gross, based on an bing degree of production engineering. The analysis of bank efficiency, hence, relies on intra- sector comparings, involves both technological and comparative pricing facets, and has a partial indexs value for analysing productiveness public presentation. The construct of productiveness, on the other manus, refers to the public presentation of the sector as a whole and efficaciously combines alterations in efficiency and technological progresss in an mean step. The undermentioned figure organizes different facets of efficiency steps in — — –

Input Efficiency: The input efficiency steps concentrate on the grade of efficiency with which Bankss combine their inputs to bring forth a given degree of end product at minimal disbursal. For illustration, a diminution in the ratio of operating costs to net income of Bankss may be interpreted as an indicant of some betterment in bank ‘s efficiency and, hence, some possible addition in productiveness. However, any such decisions must be drawn with a cautiousness. This step can be affected by alterations in the mark-up over costs so that it reflects alterations in the industry ‘s competitory pattern every bit much as alterations in its productiveness.such a diminution, far from bespeaking cost minimisation through input efficiency, could alternatively, be reflecting oligopoly rents. Another step used as input efficiency measuring parametric quantity is the ratio of operating costs to mean assets. A autumn in this ratio may be mis-interpreted as the betterment in efficiency. Such a autumn may be strictly because of compositional displacement in Bankss ‘ concern that has decreased the ratio without any addition in the efficiency of their single operations.

Number of Staff: ( Input )

Since assorted types of resources which are non inter-convertible, are employed in accomplishing the production of goods, productiveness can be measured in footings of any of these resources. But it is usual to mensurate it in footings of labor employed. This is so because it is labour productiveness that finally deter mines the criterion of life of a state. In fact, the construct of productiveness would be found missing preciseness and lucidity if the particular significance of labour productiveness is non associated with it.

Branch Network: ( Input )

The societal control over banking and the policies associated with bank Nationalization had infused a centrifugal inclination to the spread of banking so as to forestall its concentration in urban and well-developed parts. With the fiscal sector reforms initiated in the mid -1990 and with the freedom given to scheduled commercial Bankss to run in a liberalized environment, a centripetal inclination has been in trend whereby bank ‘s operations have been progressively attracted by those sector and part which are comparatively bosomy and rich. As is widely known the majority of the territorial spread of subdivision web peculiarly in rural countries and developing parts, took topographic point prior to the 1990 s. Though the reform procedure of the 1990s did non forestall the Bankss from spread outing rural subdivision web and in fact the Narasimham commission did specifically emphasis the importance of rural establishments and subdivision banking, in world quite the reverse has happened. The spread of bank subdivisions has tended to concentrate in urban and metropolitan Centre during liberalisation period.

Until banking reforms the RBI, as a policy shaper, enforced slow down in branch enlargement in metropolitan countries. On the other manus steady additions peculiarly in the figure of rural subdivisions were encouraged on the consideration that the scheduled commercial Bankss had a function to play in subdivision banking in the procedure of institutionalization of rural nest eggs. Branch Expansion: – The branch enlargement policy seeks to accomplish two wide aims ( 1 ) contracting down regional instabilities ( 2 ) supplying banking installations to rural and ignored countries. The policy chiefly accent on opening more offices in rural and semi-urban countries and Centre ‘s which have few or no subdivisions without endangering subdivision enlargement in urban and metropolitan countries.

Output Efficiency

Let us now turn to some steps of Bankss ‘ efficiency in pricing and accomplishing degrees of end product. Banks can bear down their clients fees for services, can try to reimburse their costs by bear downing a higher border or, as is more likely, they can utilize some combination of fee charges and involvement incomes. So, the service fee comparings or the mean involvement spread can be used as steps of efficiency. Measures of proficient end product efficiency include estimations of bank ‘s scale efficiency. Scale efficiency refers to Bankss or subdivisions accomplishing an optimal size for bring forthing fiscal services and thereby, guaranting operation at the minimal point of the mean cost curve. This can be judged from the nature of relational-ship between house size and house efficiency. The scheme adopted by the Bankss in India was to re-engineer their procedures ( through placing cardinal concern activities that can either be streamlined or eliminated ) , upgrading the accomplishments of its labour force and increasing the usage of engineering. Over clip, the net consequence of these enterprises has resulted in important betterments in branch efficiency. As good, the increased competition ensuing from fiscal deregulating may go on to supply drift for the accomplishment of farther proficient end product efficiencies through range economic sciences. Economicss of range are achieved when a bank recognizes that the cost of bring forthing a scope of end products is less than the cost of bring forthing them independently.

Productivity Indexs

“ When the word productiveness is used without farther making, the productiveness of labor is understood. ” ( Terminology of Productivity P. 4 ) . A preponderantly fabrication orientated society is traveling at a rapid velocity towards a service oriented society. A big no of service professions have come to busy a important topographic point in the society. These include the Bankss, fiscal Institutions, infirmaries, schools and colleges etc. Jointly this sphere is referred to as the service sector. Productivity measuring is every bit relevant to service organisations. For mensurating productiveness in service sector like banking Industry success is mostly depends upon how good human ( labor ) and subdivisions meet outlooks or public presentation. Every endeavor has a per centum of employees who are considered as a supplier of effectual services or back up the procedure of production. The worth of human resources, the most valuable assets of any organisational possesses is difficult to document in fiscal footings. Ill utilised or unutilized resources of a state earnestly hamper its economic development. Standards labor and subdivision efficiency is considered as an of import factor in productiveness. Productivity is frequently considered the consequence of all personal ( labour ) and organisational ( subdivisions ) attempts associated with the production for bring forthing goods and presenting services. The common end to go competitory and maintaining net income requires changeless monitoring of return on human and organisational attempts.

Human resources refer to the value of productive capacity of a house ‘s human organisation and the value of its client good will ( likert 1967 ) . But human resources can and should be measured is slightly uncomfortable and baleful because work forces, unlike machines, have different attitudes, tempers, heterogenous civilizations, feelings and, above all, aspirations. Their behavior alterations from clip to clip. This makes it hard to standardise the services. Since the production and ingestion of service take topographic point at the same time, the quality control on end product is impossible by the very nature of activities undertaken by the industry. Furthermore, Bankss require a to the full trained staff with specialised selling accomplishments to make client satisfaction. However, human resources are an organisation ‘s most valuable assets. The productiveness of labor in an economic system as a whole is the ratio of entire end product to number labour input ; the productiveness of labor in a peculiar Industry or works is the ratio of the end product of that Industry or works to labor input in the Industry or works. It is necessary to do an efficient usage of the services of labor. It is numerator ( end product of wealth ) that one wants to increase, non the denominator ( Input of labor ) .Due to the intangibleness of banking services, the quantitative measuring of the end point end product that is services afforded to a client is conspicuous by its absence. Furthermore, the human factor has a prevailing function in running this labour intensive industry. The ‘Profit and Loss Account ‘ of any major bank in India, can uncover that 55 to 65 per centum of the operating disbursals ( that is, entire disbursals minus involvement paid on sedimentations and adoptions ) are accounted for by the staff costs. Almost every bank and fiscal establishment is involved in assorted maps in a twenty-four hours ‘s occupation and therefore requires a extremely effectual squad and appropriate work force to run the show. Corporate ends are translated into feasible worlds and net incomes merely with human component that play their due function in accomplishing the coveted consequences.

Beginnings of productiveness:

Present competitory environment in concern requires companies to present quality merchandises at lower cost monetary values in order to capture market portion. For production every concern uses different factors of production. Any factor which reduces the waste in any signifier or increases efficiency can be called a beginning of productiveness. Anything which is go oning in the society or economic system may be assisting or impeding productiveness.

For example- addition or lessening in offense may impede or assist productiveness.Crime is one beginnings of lost labors due to additions in offense activity the of import factor of production i.e. labors are non indulging in the production in this manner they are non take parting in any production activity. On the other manus if there is a peace in the state or cut down offense will be a beginning of productiveness. Servicess companies use several techniques to mensurate and estimate their operational efficiency by comparing and analyzing their operations with the highest industry criterion is one of the qualitative methods used. Quantitative analyses of the company ‘s operations, analysis of fiscal statements, analysis of the cost of goods, consumer studies, are some of the methods used to acquire statistical informations on operational efficiency.

Rostas, L. , Comparative Productivity in British and American Industry, Cambridge University Press, London, 1948.

Srivastava T.N and A.K.Sharma ( 1984 ) , “ Productivity in Banks-Comparative Evaluation of Fourteen Nationalized bank: Bank Economists Meet. Collection of paper presented at the Madras Conference 1984 pp 232-45.

Beri G.C. , ” Measurement of Production and Productivity in Indian Industry ” , 1952 p.90.

Silver, M.S. , “ Productivity Indices- Methods and Application ” Grower Publishing Co. , England, 1984, p-25.

Kopleman, Richard E. , pull offing productiveness organisation MC Graw- Hill Book Company, new York, 1986 p-3.

Hinricks, R.Johan, Practical Management for productiveness, new wave nostran Reinhold Company, New York, 1978.

Barry, W.S ; Airlines Management, George Allen and Unwin Ltd. , London,1975, quoted in Agarwal, M.D. , Operational Efficiency of Public Enterprises, Prateekksha Publications, Jaipur 1987, p.3.

Lal, B.B. , Industrial Productivity and Economic Growth, Chaitanya Publishing House, 1965, P.1.

Smith, I.G. , “ The Measurement of Productivity ” , Grower Press, 1973.

Organization for European Economic Co-operation Terminology of Productivity ( Paris, 1950 ) , P. 4.

Likert, Rensis. The Human organisation: Its Management and value, New York: MC Graw- Hill Book Company, 1967.

Ranjit, Robert M.R & A ; D Productivity, 2nd Ed. , Culver City, California: Hughes Aircraft Company, 1978.


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