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How Productivity Of A Country Can Impact Its Currency

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What does Productivity mean?

Productivity can be described as the ratio between output volume and the input volume. In simple words, it measures how efficiently various production inputs like labour and raw materials are being used in an economy to get the desired level of output.

Productivity is considered to be a key indicator of economic growth and competitiveness and is basic statistical information for comparisons among different nations and for assessing a country’s performance. Productivity can be used to analyse the impact of product and labour union regulations on economic performance.

The productive capacity of a nation can be estimated based on productivity growth. Analysts also determine the capacity utilisation, which helps in knowing our position in the business cycle to forecast economic growth. In addition to this, Productivity can be used to assess forces of demand and supply and inflationary pressures.

There are many parameters used to determine Productivity. One of the widely used parameters is the Gross Domestic Product (GDP) per hour worked. This measure also takes labour inputs into account than just looking at output per employee. The measurement should also consider the differences in workers’ educational attainment, skills, and experience.

Accordingly, economists have adjusted to accommodate developing labour input measures. Productivity focuses on four major areas which are economy-wide indicators of productivity growth, followed by income and productivity levels, including a measure of productivity-diversity, next is growth indicators by industry and services. Lastly, the impact of labour productivity on unit labour costs is discussed.

What does the Productivity of a country measure?

Productivity leads to improvement in many areas which are classified as:

Resource Shifts – There has been a huge shift in resources from the low productive agricultural sector into the more productive sector in the manufacturing industry and construction. This has lead to urbanisation, and more people are moving to cities.

New Technology and Innovation – There is a willingness among industry men to adapt to new production technology and process innovation. For example, the modernisation and expansion of smartphones around the globe.

Infrastructure – Heavy government spending on critical infrastructure has improved the overall efficiency of the economy. Because of Productivity, there are reduced transport delays and increasing communication speeds.

Management – Privatization of state-owned businesses has been a factor behind better Productivity. Even the economists have mentioned in their report that sophisticated methods of control, higher productive use of assets, and rapid globalisation have boosted Productivity.

FDI – Productivity has clearly brought in more investment from foreign institutions. FDI triggers technology spillovers, assists human capital formation, contributes to human capital formation, contributes to international trade, and helps create a more competitive business environment and enhances enterprise development.

Wages – As the need to boost domestic demand is increasing the countries have made their long term plan in such a way that there is strong pressure for mean wages to rise, especially in the developing nations.

A reliable source of information on Productivity for Major currencies

The productivity data is provided maintained by two big OECD (Organization for Economic Co-operation and Development) databases, which are ISDB (International Sectoral DataBase) and STAN (Structural Analysis database). Because of the comparability of the two publishing agencies, we are able to combine them to obtain consistent series from 1970 to 1999 for the United States, Japan, and four other euro area countries.

There are also business magazines and economic websites that publish the data and provide a detailed analysis of what factors are making this change and what can contribute in the future. Here are productivity estimates of some major economies of the world:

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/productivity

AUD – https://tradingeconomics.com/australia/productivity

USD – https://tradingeconomics.com/united-states/productivity

EUR – https://tradingeconomics.com/euro-area/productivity

CHF – https://tradingeconomics.com/switzerland/productivity

CAD – https://tradingeconomics.com/canada/productivity

NZD – https://tradingeconomics.com/new-zealand/productivity

JPY – https://tradingeconomics.com/japan/productivity

What do traders care about Productivity and its impact on the currency?

The impact of productivity gains on currency’s value depends on the distribution of the gains across the “traded” and “nontrade” sectors of the economy. The traded sector is composed of industries such as manufacturing where they produce goods for exports and products that compete with foreign imports.

The nontrade sector consists of industries that solely produce products for domestic markets where there is no presence of foreign manufacturers. The prices of traded goods made in different countries tend to move higher.  As traded goods are exchanged in the world market, this is set to appreciate the value of the currency of that country, thereby increasing the inflow of funds. The price of non traded goods can differ across countries because the goods are not traded on the same market.

The currency shows growth as long as the price of non traded goods is under control as this increases citizen’s spending, and they buy more durable goods, which increases profits of companies and improved the economy. Labour mobility within a country encourages consistency in wages across sectors.

For instance, rising wages in the traded sector will boost wages in the nontraded sector because firms want to prevent their employees from working in the traded sector and contribute more towards their nation-building. In this way firms within the country help in the growth of the economy.

Frequency of the release

Productivity  is measured monthly in most countries. However, there is also a collective data published on a yearly basis which combines the monthly statistics of the country. From a trading point of view, previous data should be a basis for estimating future numbers and the decision of investing should involve a history of data analysis and not based on a single release.

The Bottom Line

When Productivity fails to grow significantly, it reduces the scope for rising wages from corporates, lowers company profits, and living standards.

Investment firms and people only put in their money where the level of savings is high. Low savings due to inflation can lead to lower investment rates and lower growth rates for labour productivity and real wages. This is why it is often feared that a low savings rate in a country could hurt productivity growth in the future. Hence the government and state need to invest more in education, training, and research to enhance Productivity and promote capital investment.

According to economists, the best way to achieve this is by reforming corporate taxation and increase investment in manufacturing.

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