Understanding productivity

High productivity helps raise our standard of living and keep our economy competitive.

What productivity means

Productivity measures efficiency: how much is produced in a set amount of time.

• Inputs are everything that a person or business needs to perform a task, including labour, equipment and supplies.
• Output is what a person or business produces from the inputs.

For example:

• A baker’s inputs might include a kitchen, baking ingredients, ovens and staff to make and sell cookies.
• The baker’s output might be five dozen cookies per hour.

The usual way to assess productivity is to look at the volume or value of what the business produces.

How productivity grows

Increased productivity means greater efficiency: the economy is producing more or higher-value outputs from the same amount of inputs.

Let’s go back to the cookie example: the baker may look to improve cookie output by buying new equipment or by rearranging the production line. With these changes, the baker’s staff could work faster with the same inputs. This might increase the bakery’s output to six dozen cookies per hour. Or the changes may result in better-tasting cookies, allowing the baker to charge a higher price.

That’s productivity growth: the baker produces more or better quality from what is put in.

How productivity growth helps the economy

A bakery with six dozen cookies available to sell each hour can earn more money than one with only five dozen. Likewise, a baker who sells better-tasting cookies at a higher price can generate more profits.

Higher profits mean more disposable income and a better standard of living. The baker might decide to give the staff a raise, hire more workers or expand operations. When this is happening across many businesses, it helps the whole economy grow.

How we support productivity growth

At the Bank of Canada, we work to preserve the value of money by keeping inflation low, stable and predictable. When companies can count on low, stable and predictable inflation, they can budget for the future with greater confidence. This includes making decisions to invest in people and technology that will increase their productivity.

Productivity growth has another benefit: the more productive an economy, the more it can grow without sparking inflation. And that generally means there is less need to raise interest rates.