Increased productivity creates economic growth
This page summarises evidence on the relationship between increased productivity of firms contributes and economic growth. It includes positive correlations between increased investment and economic growth, since increased productivity is one possible way of how investment affects economic growth.
Increases in productivity allow firms to produce greater output for the same level of input, and thus result in higher Gross Domestic Product.
A study of agriculture in Thailand and Indonesia by Warr (2006) shows that, between 1981 and 2002, productivity increases in the sector following the introduction of irrigation accounted for 5% of overall GDP growth in Thailand and 3.5% in Indonesia. Moreover, the productivity increases in agriculture freed up resources which could then be put to use in other sectors. This reallocation contributed 16% to overall GDP growth in Thailand and 24% in Indonesia.
A global review by ILO (2013) examines the impact of labour productivity on growth. It finds that increases in labour productivity within economic sectors is the main driver of economic growth (rather than sectoral re-allocation). In particular, growth in industry and services play an important role for aggregate economic growth.
