List and describe the determinants of productivity growth De

List and describe the determinants of productivity growth. Describe how higher rate of savings lead to higher GDP and standard of living.

Solution

1. Innovation: Research and development that results in innovation which positively affects productivity growth. Innovative technology improves productivity of labor and also influences the output growth.

2. Taxation: Higher rates of taxation on investment negatively influence productivity growth. Higher rates of taxation reduces the future savings and private investment as it diverts the private sector savings to public consumption. Thus, lower rate of taxation are said to positively influence investment in innovative technologies.

3. Human capital: Investment in human capital such as higher education focusing on technical skill development augments human capital. The productivity growth can be linked with how the human capital is developed which can further productivity growth.

Savings rate refer to the proportion of income that is not spent but instead is saved and often put in a bank. When banks lend those savings to private players, it results in a higher rate of investment. As firms invest, they hire more people, create higher output as they sell that output in the economy. This results in a higher GDP and also improves the standard of living of those who participate in the economic activity.