Productivity Model - Models of National Economy

Models of National Economy

In order to measure productivity of a nation or an industry, it is necessary to operationalize the same concept of productivity as in business, yet, the object of modelling is substantially wider and the information more aggregate. The calculations of total productivity of a nation or an industry are based on the time series of the SNA, System of National Accounts, formulated and developed for half a century. National accounting is a system based on the recommendations of the UN (SNA 93) to measure total production and total income of a nation and how they are used.

Measurement of productivity is at its most accurate in business because of the availability of all elementary data of the quantities and prices of the inputs and the output in production. The more comprehensive the entity we want to analyse by measurements, the more data need to be aggregated. In productivity measurement, combining and aggregating the data always involves reduced measurement accuracy.

Output measurement

Conceptually speaking, the amount of total production means the same in the national economy and in business but for practical reasons modelling the concept differs, respectively. In national economy, the total production is measured as the sum of value added whereas in business it is measured by the total output value. When the output is calculated by the value added, all purchase inputs (energy, materials etc.) and their productivity impacts are excluded from the examination. Consequently, the production function of national economy is written as follows:

In business, production is measured by the gross value of production, and in addition to the producer’s own inputs (capital and labour) productivity analysis comprises all purchase inputs such as raw-materials, energy, outsourcing services, supplies, components, etc. Accordingly, it is possible to measure the total productivity in business which implies absolute consideration of all inputs. It is clear that productivity measurement in business gives a more accurate result because it analyses all the inputs used in production. (Saari 2006b)

The productivity measurement based on national accounting has been under development recently. The method is known as KLEMS, and it takes all production inputs into consideration. KLEMS is an abbreviation for K = capital, L = labour, E = energy, M = materials, and S = services. In principle, all inputs are treated the same way. As for the capital input in particular this means that it is measured by capital services, not by the capital stock.

Combination or aggregation problem

The problem of aggregating or combining the output and inputs is purely measurement technical, and it is caused by the fixed grouping of the items. In national accounting, data need to be fed under fixed items resulting in large items of output and input which are not homogeneous as provided in the measurements but include qualitative changes. There is no fixed grouping of items in the business production model, neither for inputs nor for products, but both inputs and products are present in calculations by their own names representing the elementary price and quantity of the calculation material. (Saari 2006b)

Problem of the relative prices

For productivity analyses, the value of total production of the national economy, GNP, is calculated with fixed prices. The fixed price calculation principle means that the prices by which quantities are evaluated are hold fixed or unchanged for a given period. In the calculation complying with national accounting, a fixed price GNP is obtained by applying the so-called basic year prices. Since the basic year is usually changed every 5th year, the evaluation of the output and input quantities remains unchanged for five years. When the new basic-year prices are introduced, relative prices will change in relation to the prices of the previous basic year, which has its certain impact on productivity

Old basic-year prices entail inaccuracy in the production measurement. For reasons of market economy, relative values of output and inputs alter while the relative prices of the basic year do not react to these changes in any way. Structural changes like this will be wrongly evaluated. Short life-cycle products will not have any basis of evaluation because they are born and they die in between the two basic years. Obtaining good productivity by elasticity is ignored if old and long-term fixed prices are being used. In business models this problem does not exist, because the correct prices are available all the time. (Saari 2006b)