This article of discussion talks about an unusually large gap in productivity growth between large and small firms in Mexico. It addresses how Labor Productivity growth affects the economy and how the economy is burdened by small firms, despite large firms rapidly improving through investments in both technology and skills. In this assignment, I will be discussing how productivity would affect the Gross Domestic Product (GAP), GAP Growth, GAP per capita and the Sources of Economic Growth that could affect Mexico future economy.
GAP refers to the monetary value of all finished goods and services produced within nation’s borders in a specific time period, usually calculated annually. It includes all private and public consumptions, government outlays, investments and exports less imports that occur within the nation. Immediate goods, or goods that were manufactured as part of the finished goods are excluded from the GAP count to avoid double counting. GAP are expressed in two terms, Nominal GAP and Real GAP.
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Nominal GAP reflects the value of all goods and services which are produced during a given time period, using the price at the time of production. Real GAP is similar to Nominal GAP, except that it uses a given base year price indices to remove effects of inflation. GAP Growth Rate refers to the rate of change that a nation’s GAP experiences from one year to another. GAP per capita is known as the income per person, calculated by dividing the GAP over the total population of a nation. It is generally used to compare wealth between nations, as it shows the relative performance of the nations.
Lastly, there are two Sources of Economic Growth: Aggregate Hours and Labor Productivity. Aggregate Hours refer to the sum of all hours worked by all employed workers in a company. Labor Productivity is known as he quantity of output per time spent. In the article of discussion, it is evident that Mexico economy has performed poorly over a span of 10 years from 1999 to 2009, with Labor Productivity declining in small firms, of 10 or fewer workers, at an annual rate of 6. 5%, despite an annual increase of 5. 8% in large firms, of 500 or more workers.
Additionally, the employment in small firms had increased from 39% to 42%, thus further burdening the economy of Mexico, as small firms are less productive. This greatly affects the GAP Growth Rate as reflected in the article that developing economies’ low productivity segments are not whirring but on the contrary, are expanding. The graph below shows that how the annual GAP of Mexico shrank from slightly above 6% in 1999 to -5% in 2009: Although it is seen that the growth rate fluctuates up and down, it never went higher than 6% again and there were more declines than increments.
It is also a possible cause for the drop of GAP per capita as low productivity is a result of unproductive workers, leading to workers being fired, thus reducing the average income of the Mexican population. This would further increase the gap between the leading and lagging sectors of the Mexican economy. The article also explores Sources of Elements of Economics By Gabriel Mean-Song which refers to an economic condition that occurs when an economy changes how it functions.
The article also explains the downsides of structural change, which has become increasingly perverse, such as from treatable to non-treatable activities, organized sectors to informality and medium-sized and large firms to small firms, hence showing that these patterns of structural change can exert a sizeable impediment on economic growth. The article goes further and provides two strategies that could close the gap between the leading and lagging sectors of the Mexican economy.
Firstly, governments will need to support small and misinterpreted as they would mature, enter the formal economy, and become more productive. This would be difficult as these misinterpreted are not well supported by government bases – they are excluded from global markets, have little access to finance and are brimming with workers and managers who possess low and insufficient skill sets, qualifications and education. The article also explains that despite many government efforts to empower these small enterprises, there are few successful cases.
This is because support for small enterprises often serves social policy goals, such as sustaining the incomes of the economy’s poorest and most ostracizes workers, rather than inspiring output and productivity growth. This strategy would result in an increase in Labor Productivity in terms of Human Capital Growth, Physical Capital Growth and Technological Advances respectively: Workers could be supported with education and on-the-Job training, thus gaining Job experience as well. Focus could also be placed on maximizing the potential of workers and thus increase output and productivity growth.
The investment decisions made by the government to support these small enterprises would benefit new capital accumulation and thus increase the capital per worker and the Labor Productivity. Having been trained and educated, workers will be able to adapt to technological changes like the discovery and application of new technologies and machines that would contribute significantly to Labor Productivity. The second strategy is to provide opportunities for modern and well-established firms so that they can expand and employ the workers that would otherwise be hired by the less productive sectors of the economy.
Results of studies conducted shows that few successful businesses began as small firms but rather, started at considerably large scales by entrepreneurs who acquired their skills and market knowledge in the more advanced sectors of the economy. This strategy would result in an increase in economic growth as it would cause a positive change in the Aggregate Hours. When the working-age population increases, there would be more unemployed workers in the economy, thus, the expansion of modern, well-established firms would create more Jobs for these workers and it would also cause a positive change in the employment-to-population ratio.
The average hours worked per worker would also increase as there would be more workers, thus raising the Aggregate Hours. In conclusion, I feel that Labor Productivity growth in both small and large firms in Mexico, greatly affects the economic growth of the nation, in terms of the Gross Domestic Product (GAP), GAP Growth Rate, GAP per capita and the Sources of Economic Growth. GAP Growth Rate would increase when the low productivity as there is a possibility of more unemployed workers, thus lowering the average income of the population of Mexico.