A sustained period of low productivity growth is a detrimental effect to an economy especially in the long run however there may be some short run benefits. Productivity refers to the effectiveness of productiveness and it is measured by rate of output per worker. In the UK economy, the government wishes to achieve full employment, stable prices, a balance of trade where imports do not exceed exports and economic growth. Below, the economic cycle diagram shows that the UK economy is suffering from low productivity at point b where there is spare capacity in the economy.

(economic cycle showing that low productivity occurs at point b)

In Extract E it states that ‘British workers were 20% less productive than the average for the G7 countries and almost 40% less productive than the average worker in the US’. With the UK having low productivity it means that there will be higher unit costs, as costs will be passed on to consumers in higher prices, which will discourage demand and reduce the overall output. Furthermore, our price competitiveness and trade performance will decrease so businesses will not have competitive advantage in markets. In 2011, UK productivity was below 2007 at an index of 97 compared to 100 in 2007, showing negative productivity growth.

(AD diagram shifting leftwards)

The diagram above portrays how there will be a reduction in demand for the UK exports but more of a demand for imports which will further reduce aggregate demand shown by a leftward shift from AD1 to AD2 and there is increase in the balance of trade deficit which causes the UK economic growth to decrease however it will reduce the unemployment levels.

Low productivity has helped employment levels in the UK in the short run compared to the US that has seen productivity growth. Firms need more labour to produce the same output and during the recession the UK has seen