Resource Allocation

Measurement

There are two measures that are commonly used to assess the efficiency with which Australians are allocating our resources – Labour Productivity and Multi-Factor Productivity.

Productivity is a measure of the output per unit of input. If we are able to produce a higher quantity from the same number of inputs, or if we can produce the same quantity from a smaller number of inputs, we can say that we have become more productive.

Labour productivity measures our output relative to the number of official hours that employees in Australia have completed. To assess this we need to look at the total level of output (ie our Real GDP) and the total number of hours worked in the economy. The formula then becomes:

Labour Productivity =	Real GDP
	Total hours worked by all employees

The ABS produces an index each year that allows for the calculation of the total number of hours worked. From that the measure of labour productivity can be calculated.

The result is an indication of the increase in output per hour. For example, you will soon see that labour productivity improved in 2005/06. At this time, the ABS has suggested that our GDP per hour worked increased by 2.2%. This indicates that for each hour worked in Australia output was 2.2% higher.

A second measure that is often used is multi-factor productivity. This measure recognises some of the limitations associated with labour productivity and tries to account for them. Most importantly, an increase in output can rarely be attributed to only one input. Whilst labour is an important input, it is not the only input. Multi-factor productivity attempts to calculate the increase in output from a given combination of inputs. In Australia, we combine the impact of labour and capital resources to examine multi-factor productivity.

To calculate multi factor productivity, we use the following formula:

Multi-Factor Productivity =	Real GDP
	Total cost of all inputs used for production

In effect, we are saying here that given a certain value of inputs purchased by firms, how effectively have we been able to transform these inputs into finished goods and services? You will soon see that in 2003/04 the level of multi-factor productivity improved to 1.8%. This suggest that given the value of inputs (labour and capital) used in the production process, Australian firms were able to produce 1.8% more.

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