Question

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

U.S. LDC
Sales (units) 100,000 20,000
Labor (hours) 20,000 15,000
Raw materials (currency) $20,000 FC 20,000
Capital equipment (hours) 60,000 5,000
a. Calculate partial labor and capital productivity figures for the parent and subsidiary. Do the results seem confusing?
b. Compute the multifactor productivity figures for labor and capital together. Do the results make more sense?
c. Calculate raw material productivity figures (units/$ where $1=FC 10). Explain why these figures might be greater in the subsidiary.

Answer 1

a. Labor Productivity:

Country Sales (Units) Labour (hours) Productivity (Sales/Labour hours)

U.S 100,000 20,000 5 units / hours

LDC 20,000 15,000 1.33 units/ hours

Capital Productivity

Country Sales (Units) Capital (hours) Productivity (Sales/Capital hours)

U.S 100,000 60,000 1.67 units / hour

LDC 20,000 5,000 4 units / hours

Conclusion: Yes, the result seems confusing. The labour productivity in U.S. is higher than LDC while the capital productivity in U.S. is lower than LDC which is contradictory.

b. Multi-factor productivity for Labor and Capital

Country Sales Input Productivity

(Units) (Labor + Capital) (units/hours)

U.S. 100,000 80,000 1.25 units/hour

(20,000 + 60,000)

LDC 20,000 20,000 1 units/hour

(15,000 + 5,000)

Conclusion: Yes it make sense as multi-factor productivity is better than partial productivity. Labor and capital are subtitles and that gives better presentation of the productivity.

c. Raw material productivity

Country Sales Raw material Productivity

(Units) (Currency) (units/hours)

U.S. 100,000 $20,000 5 units per dollar

LDC 20,000 = $2,000 10 units per dollar

Conclusion: The figures are greater in subsidiary because the price paid for raw material is much slower than the parent country.

Note: $1 = FC 10

$20,000 = FC 10

FC = $20,000 / 10 = $2,000