Question

Question: A U.S. manufacturing company operating a subsidiary in an LDC (less-developed country) shows the following results:

a. Calculate partial labor and capital productivity figures for the parent and subsidiary. Do the results seem confusing?

b. Compute the multifactor productivity figures for labor and capital together. Do the results make more sense?

c. Calculate raw material productivity figures (units/\( were \)1 5 FC 10). Explain why these figures might be greater in the subsidiary

Short answer

Answer

a. Labor productivity

• U.S: 5 units per hour
• LDC: 1.33 units per hour

Capital equipment productivity

• U.S: 1.67 units per hour
• LDC: 4 units per hour

Yes

b. Multifactor productivity

• U.S: 1.25 units per hour
• LDC: 1.00 units per hour

Yes

c. Raw material productivity

• U.S: 5 units per dollar
• LCD: 10 units per dollar
• Due to the lower cost of raw material

Step-by-step solution

Getting the formula for productivity

Productivity is measured by dividing the input by output. The higher the result, the higher the productivity

(a) Calculating labor productivity.

$\begin{array}{rcl}\text{Labor} \text{productivity} \text{of} \text{U.S}& =& \frac{\text{Output}}{\text{Input} \text{in} \text{hours}}\\ & =& \frac{100000}{20000}\\ & =& 5 \text{units} \text{per} \text{hour}\\ \text{Labor} \text{productivity} \text{of} \text{LDC}& =& \frac{\text{Output}}{\text{Input} \text{in} \text{hours}}\\ & =& \frac{20000}{15000}\\ & =& 1.33 \text{units} \text{per} \text{hour}\\ & & \end{array}$

Calculating capital productivity

$\begin{array}{rcl}\text{Capital} \text{productivity} \text{of} \text{U.S}& =& \frac{\text{Output}}{\text{Input} \text{in} \text{hours}}\\ & =& \frac{100000}{60000}\\ & =& 1.67 \text{units} \text{per} \text{hour}\\ \backslash \text{Capital} \text{productivity} \text{of} \text{LDC}& =& \frac{\text{Output}}{\text{Input} \text{in} \text{hours}}\\ & =& \frac{20000}{5000}\\ & =& 4 \text{units} \text{per} \text{hour}\\ & & \end{array}$

Analyzing if the result is confusing

Yes, labor productivity is higher in the U.S., but capital productivity is lower. The measure seems to contradict.

Defining multifactor productivity

When productivity is measured by combining various inputs, and the result is used for diving output, it is known as multifactor productivity.

(b) Calculating multifactor productivity

$\begin{array}{rcl}\text{Multifactor} \text{productivity} \text{for} \text{U.S}& =& \frac{\text{Output}}{\text{Raw} \text{material + Capital} \text{equipments}}\\ & =& \frac{100000}{20000+60000}\\ & =& \frac{100000}{80000}\\ & =& 1.25 \text{units} \text{per} \text{hour}\\ \text{Multifactor} \text{productivity} \text{for} \text{LDC}& =& \frac{\text{Output}}{\text{Raw} \text{material + Capital} \text{equipment}}\\ & =& \frac{20000}{15000+5000}\\ & =& \frac{20000}{20000}\\ & =& 1 \text{unit} \text{per} \text{hour}\\ & & \end{array}$

Analyzing if the result is better

Yes, multifactor productivity is much better as labor and equipment can be substituted for each other.

(c) Calculating raw material productivity

Given: that $1 is equal to FC 10

$\begin{array}{rcl}\text{Raw} \text{material} \text{productivity} \text{of} \text{U.S}& =& \frac{\text{Output}}{\text{Input} \text{in} \text{dollars}}\\ & =& \frac{100000}{20000}\\ & =& 5 \text{units} \text{per} \text{dollar}\\ \text{Raw} \text{material} \text{productivity} \text{of} \text{LDC}& =& \frac{\text{Output}}{\text{Input} \text{in} \text{dollars}}\\ & =& \frac{20000}{2000}\\ & =& 10 \text{units} \text{per} \text{dollar}\\ & & \end{array}$

Analyzing why these figures will be greater in subsidiaries

The raw material productivity will be higher for subsidiaries because the cost of raw materials is low in LCD, which increases productivity.