Elements of Economics

Topics: Economic growth, Economics, Gross domestic product Pages: 5 (1490 words) Published: May 26, 2014
This article of discussion talks about an unusually large gap in productivity growth between large and small firms in Mexico. It addresses how Labour 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 (GDP), GDP Growth, GDP per capita and the Sources of Economic Growth that could affect Mexico’s future economy.

GDP refers to the monetary value of all finished goods and services produced within a 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 GDP count to avoid double counting. GDP are expressed in two terms, Nominal GDP and Real GDP. Nominal GDP 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 GDP is similar to Nominal GDP, except that it uses a given base year price indices to remove effects of inflation. GDP Growth Rate refers to the rate of change that a nation’s GDP experiences from one year to another. GDP per capita is known as the income per person, calculated by dividing the GDP 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 Labour Productivity. Aggregate Hours refer to the sum of all hours worked by all employed workers in a company. Labour Productivity is known as the quantity of output per time spent.

In the article of discussion, it is evident that Mexico’s economy has performed poorly over a span of 10 years from 1999 to 2009, with Labour 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 GDP Growth Rate as reflected in the article that developing economies’ low productivity segments are not shrinking but on the contrary, are expanding. The graph below shows that how the annual GDP 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 GDP 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 Economic Growth that can be implemented and emphasizes on structural change, 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 tradeable to non-tradeable 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 microenterprises as they would mature, enter the formal economy, and become more productive. This would be difficult as these microenterprises are not well...

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