In previous chapters we were focusing on measuring production efficiency in various ways. We now know that one should use the technical efficiency measure if one is concerned with how well the technology potential is used (yet, recall that one still needs to choose an appropriate orientation of measurement – input or output or a mix of these). Furthermore, we learned that one should use cost or revenue (or profit) efficiency if, in addition, one is interested in how well different inputs or outputs (or both) are chosen or allocated with respect to the corresponding prices. The goal of this chapter is to discuss a closely related and, in fact, more general concept – the concept of productivity.

A roadmap for this chapter is useful. We will start by clarifying the differences and relationships between the two main themes of our book: efficiency, which we explored in detail in previous chapters, and productivity, which we will focus on in this chapter. We then consider different approaches to productivity measurement. We will start with the classical growth accounting approach and then move on to the economic approach using index numbers, where we will first consider price indexes, then quantity indexes and then productivity indexes. We also examine some of their decompositions and the relationships among them. After considering a wide range of approaches within the economic approach to index numbers, we will then show that the growth accounting approach can be considered as a restrictive special case. We will finish the chapter with a discussion of transitivity (or circularity) of indexes, what it means in general and for indexes in particular, and how desirable or critical and restrictive this particular property is for an economic index number. We then discuss the sacrifices one must make in order to preserve transitivity and how to mitigate problems with the index number approach when transitivity is not imposed. We conclude with brief remarks on the literature, which will be further discussed in Chapter 7.

PRODUCTIVITY VS. EFFICIENCY

While a lot has been done on efficiency measurement in production, it is a relatively modern area in economics and long before its academic origins, people already used, and still use, the notion of productivity.