Posted on 12/02/2007 4:53:00 AM PST by Zakeet
Productivity and growth are not the same thing, sorry.
No they are not. If productivity increases 5%, then the labor and capital costs in producing certain goods or services should decrease by 5%. This means that the price level should decrease 5%, and if it does not, then there has been a 5% inflation offsetting the 5% improvement in productivity.
Yup, hence a 5% increase in monetary supply and 5% productivity increase would have a net of 0. When you add a growing economy on top of that, real inflation would not be M3. It theoretically should be M3 - Growth - productivity increase. Growth and productivity are mutual exclusive.
Nope. You cannot put productivity into the CPI calculation. Here are some simple example. If GDP increased 5% and monetary supply increased 5% inflation is zero.
If GDP increase zero and monetary supply increase 0 inflation is zero.
If GDP increases zero, but productivity increases 5% what does inflation do? Also nothing. While some goods have decreased in cost by 5%, that extra 5% is now chasing the other goods in the economy. Net output is unchanged and net dollars are unchanged.
What you hope is that the 5% improvement in productivity leads to a 5% increase in production because the saved labor hours are now invested elsewhere. Then one has 5% increase in GDP, and zero net inflation would accrue if one increased dollars by 5%. If one increased money in circulation by nothing, increased GDP 5% then one would have deflation, ie, more goods for the same price.
So, productivity increase is a necessary factor in GDP increase per capita, but it is independent of inflation.
I'll use widgets as an example.
This year, I'll sell $1000 worth of widgets at a cost of $700. Next year, my productivity increases 5% and it now costs me $665. Additionally, I want to sell $1030 worth of product this year instead of $1000. I can only do this (excluding increasing the money supply) by selling more of the item. Classic inflation is too much money chasing too few goods..well we're making more widgets. So my cost dropped 5% to make a widget AND I am now going to sell 3% more this year. Thus to keep the price of a widget from not dropping, I'd need to increase the money supply by around 8%.
Nope.
Classic inflation is too much money chasing too few goods
Yep. But by improving productivity, you have not changed the number of goods.
Let us use widgets and corn and wine, since we cannot talk about inflation for one good.
Of $1000 I have, I purchase one widget (a widescreen DVD to entertain my family) at $300; one unit of corn at $200, which feeds my family ; and 20 litres of wine at $25 per liter (we only drink good French stuff out of the barrel).
You improve productivity so that I only need to spend $200 on widgets. The farmer now charges me $300, because he now can, I need the corn, and he likes wine and has not been able to afford any so far. We now have $600 chasing 20 liters of wine, at a price of $30 per liter. My $500 now purchases 16.666 literes of wine instead of 20 originally. The farmer is now able to purchase 3.333 liters of wine.
So your productivity increase has not resulted in overall inflation. Total goods produced is the same, and total costs is the same. I am slightly worse off, but the farmer is a lot better off.
Productivity is deflationary, not inflationary. It absolutely affects the cost of goods. Productivity increase for the farmer means he could produce 500 bushels of corn for $300, while last year he could only do 480 for $300. That absolutely causes deflation.
Here we have a problem with definitions. The Bureau of Labor Statistics defines productivity as output / labor hours. Labor hours decreasing for a unit of output does not increase the number of products.
If the farmer now produces 5% more goods then inflation/deflation adjusted GDP would grow 5%, and would allow for a monetary growth of 5% to hold price levels constant.
It is not the productivity increase that affects the equation. It is the resulting GDP growth that affects the equation. It is his productivity growth that opened the way for GDP growth.
There are really only 2 ways to get GDP growth. One is population increase and the other is increase in production per unit population. In essence, productivity growth is per capita GDP growth, and you cannot add the productivity growth in again on top of GDP growth. By doing so you are simply double counting, since GDP growth already counted thee increased production from the productivity growth.
GDP growth can come from population increase and increasing the # of goods purchased per capita. Productivity does not inherently affect GDP as GDP is defined as the final value in USD. Increasing the # of items (widgets) by 5% for sale can decrease the price by more than 5% (supply/demand) in some cases thus the net GDP growth would be 0.
GDP growth can come from population increase and increasing the # of goods purchased per capita. Productivity does not inherently affect GDP as GDP is defined as the final value in USD.
GDP = consumption + investment + (government spending) + (exports − imports) Look it up.
GDP is usually adjusted for CPI (so inflation / deflation is already taken into accound). This is what BEA does, for instance (look it up).
Productivity does not inherently affect GDP.
Here you are very confused. Productivity is defined as production / labor hours. For a given quantity of labor (and total per capita work hours are more or less fixed), the only way to increase GDP is to increase productivity.
The point is that price level = (money x velocity) / GDP. Productivity does not enter into it, except in that it increases the quantity of goods available.
This is the whole point. Everything else being equal, production = consumption, so GDP can also only increase by increasing the # goods (and services) produced per capita.
For a given quantity of labor (and total per capita work hours are more or less fixed), the only way to increase GDP is to increase productivity.
You can increase GDP through expansion of labor pool and/or more hours worked. Productivity increases are deflationary. Assume for a second that next year we did not increase monetary supply at all and we had productivity increase of 5%. We would have outright deflation.
Yes, and productivity makes those products cheaper causing deflation if consumption doesn't increase. Since consumption is only going up around 3% (growth) to get back the deflation from productivity you must increase the monetary supply by said amount. If your economy is growing at 3% with inflation at 0 and productivity at %, prices per good will start to drop.
Wrong wrong wrong.
It is the same money and same number of goods, so price level is the same.
Only if the productivity increase leads to increase in production, then is there an increase in GDP. If there is an increase in GDP, then to avoid deflation, you would need to increase the money supply.
Again, the standard formula is Price =money x velocity / Goods. Only if total goods changes does anything change. Productivity is the means by which the same amount of labor hours can produce increasing goods, but the impact is increased output, i.e. increased GDP.
Realpatty, I think the response to your scoff at the strength of US manufacturing is harsh....
...and deservedly so.
We SHOULD jump on anyone posting the party line of the anti-American leftists! Don’t go along with what the meedia want you to assume when there’s obvious, clear facts to the contrary!!
Imagine if the anti-American propaganda that ‘America is failing ‘permeates the world so much that you believe it contrary to the facts and figures posted here like gusopol3’s (largest manufacturing output in American history, etc, etc), and you know that people in other countries get fed the same media diet, or worse, CNN International and Int Herald Tribune (AKA Grey Lady Intl)....wtf do you expect our image, or “influence” as you perceive it to be worldwide?
When you travel...when you go to your hotel room...remember that the wiring dimensions, utility boxes, connectors etc in your walls, if they conform to any fire safety standard...it’s to the descendent of the “National Electrical Code” (guess which nation?) a standard that expanded worldwide into much of what is the International standard.
That code was developed by American engineers throughout the 20th century to provide a way to wire places without setting them on fire.
So as you and the anti-American locals relax in that hotel in some anti-American country....they are being protected by American ingenuity.
But why would they be thankful? How could they possibly ever know things like this.
Think about that the next time you see one of those “world at night” pictures from space. Even if America was the most obnoxious country in the world...wouldn’t the number of people saved from candle fires, on balance, be enough to garner us goodwill? Well it doesn’t. And that tells you what we’re up against.
In fact, if our manufacturing output were even higher, and we exported EVERYTHING, they’d HATE US EVEN MORE!!!!
Next time you get on an elevator with an “Otis brake” or derivative thank God that America still has industrial influence in every nook-and-cranny of the world.
This is exactly my point. P=M x V / goods. If M x V is constant, then increases in goods (through increased productivity) results in lower costs, i.e. deflation. That is what I have been saying. But, productivity in and of itself does not enter into the price equation. Total goods produced does. Of course, goods produced = productivity / hours worked, and if hours worked it constant, goods produced will increase if productivity increases. IOW, if hours worked x money x velocity is constant, then increased productivity results in decreased price levels. But you have to keep in mind what is fixed and what is variable.
This is pointless
Being absolutely clear and precise about definitions and their application to basic problems is crucial. Nothing can be understood if these more "basic" problems are not understood.
wonderful rant. We don’t get paid for influence. We get paid for goods and services exported. When you travel abroad, the labels you see on high-quality manufactured goods are Japanese, and Southeast Asia, German, etc. Almost never does a Made in America label appear. Exports of manufactured goods are only 2.8% of our GDP in any case.
Decreasing the cost of production through productivity will decrease the cost of the item in reality. If I make widgets and you make widgets, but my productivity is increasing by 10% and you are only at 1%, if we make the same # of items, I can undercut the price you and I both had last year (and naturally in a competitive market I will) and still make the same amount I did last year. This happens every day all the time. To say otherwise absolutely ignores reality. Look at Intel vs AMD as an example.
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