Capital or machine

productivity
How to Calculate Machine
Productivity

 Calculating machine productivity is one way of

measuring line productivity or factorys
productivity. If you are already measuring
labour productivity of your sewing lines, you
might be also interested in calculating machine
productivity for your lines. It is easier to
estimate production capacity of a line for the
given products, if you have machine
productivity data for various product
categories. In this post I will show you how to
calculate machine productivity of a sewing line.

Formula to calculate machine

productivity
Machine productivity = (Number of total garments
produced / Total stitching machines used)
Productivity is the ratio of output and input of a
process in a defined time frame. Divide garment
output of a line by machine input.
In the readymade garment production, factories
measure productivity majorly as labour
productivity and machine productivity. Labour
productivity calculation method has been already
discussed inthis post

Machine productivity calculation

method
To calculate machine productivity of a
stitching line you need following data.
Count total stitching machines in a line
Count line output at the end of the day
(number of garments produced)
Note shift time (in hours) and total hours
factory works
Calculate machine productivity using
above formula

Example:A 40 machines line

produced 400 pieces of shirts in 8
hours shift day.

Machine productivity = 400/40 pieces in 8 hours.

= 10 pieces per 8 hours shift

This method is applicable in calculating machine productivity

for individual sewing lines as well as the whole factory.
In case your factory shift time is 10 hour, you can measure
machine productivity as machine productivity per 10 hour
shift. Or convert 10 hours productivity into 8 hours machine
productivity by following this formula.
Machine productivity in 8 hours = (Pieces produced*8)/
(Number of machines * Actual shift hours)

Exercise: Calculate machine

productivity in 8 hours for
following cases.
Li Produ No.
ne ct
of
No type
m/c
.

1 Casual
shirt
2 Formal
shirt
3 Trouser

Total
Pieces
Produce
d (Line
output)

30

400

40

350

44

420

Answers: 1=13.3, 2=7 and 3=7.63

Hour
s
work
ed/D
ay

Machi
ne
Produ
ctivit
y in 8
hours
shift
8

10

10

Increase machine productivity

Every machine used in model, mold, die and machine
manufacturing could be working productively for 8,400
hours each year. Based on an evaluation of over 100
results from the sector, we know that the machines are
working productively only 30 percent of the time,
corresponding to 2,500 hours per year. And even during
this productive time, the machines could often be used
more effectively if the processes around them were
optimized. We'll show you how to do this.
Prevent downtime
Multiple Setup
Multi-machine operation
Solutions

 Machine run time is a crucial determining factor in a

companys productivity. For example: Increasing the
productive operating time of a machine by only 500 hours
per year decreases the hourly machine cost by 15 percent
and reduces the overall manufacturing costs of your
products. You simultaneously gain 500 hours of
manufacturing capacity, so that you can either reduce
external procurement or manufacture more with the same
time and effort. These factors directly affect your
companys result and improve your efficiency and
competitiveness. Unfortunately, machine downtime in
many companies is still longer than necessary an average
of 5,900 hours per machine and nearly a year of unused
potential.

 Maintenance and cleaning are necessary, but

downtime due to missing information, collisions and setup processes
on the machines are avoidable. With our expert consulting, we help
you examine your procedures and increase your productive run time
with relevant industry-specific solutions. For example:
Generate complete programs
Optimize setup processes up to and including multiple setups
Increase process reliability as the basis for low-manpower machine
run time
Prevent collisions
Provide relevant information at the machine
Work with standardized tools
Create an online connection to external tool management systems
Plan and control for optimal utilization and better material flow

Difference between Productivity and

Efficiency

Productivity and efficiency are the primary performance measures

in garment production. We have earlier discussed about
ProductivityandEfficiencyseparately. In this post we will
understand the difference between productivity and efficiency
with an example.
Productivity is the ratio of output (products or services) and input
(labour, machine, man-hours). Productivity can be measured as
labour productivity,machine productivity, and value productivity
for a production line or of a whole factory. Lets consider you are
measuring labour productivity of a production line. Labour
productivity is defined as output (in pieces) per labour (direct
+indirect) in a given time frame. Example of labour productivity of
a Shirt line is 10 pieces per day per labour on 8 hour shift.
Efficiency is the ratio of total minutes produced and total minutes
worked by an individual operator, or a line. Efficiency is expressed
in percentage. For example, stitching line efficiency of a typical
stitching line is 56%.

Formula use to calculate productivity and efficiency

Productivity formula:

Productivity = Output / Input

Labour productivity = (Total garments produced / Number of labours
involved) in given time frame
Machine productivity = (Total garments produced / total number of
machine utilized)
Efficiency Formula:
Efficiency = (Total SAH produced / Total hours worked)*100
Or
Efficiency = (Total Minute produced / (Total hours worked*60))*100
Where, Total minutes produced = (Number of pieces produced *
Garment SAM)
Total minutes worked = (Number of workers * shift hours * 60)

 Efficiency is measured for individual operators, for each lines and

overall factory efficiency.
In garment production labour productivity is presented as number
of pieces produced per labour per shift.
Labour productivity of the same line with same number of labour
for two different products (e.g. a T-shirt and a Polo shirt) may be
different. But Line efficiency can be same in both products.
Productivity is product specific measure. When you compare your
factorys productivity with another factorys productivity, you have
to check if both factories are making same product. If different
products are made by the factories, you can do productivity
comparison by converting productivity of one product to equivalent
SAM of the second product.

 To calculate line efficiency you must have

garmentSAM(standard minutes) for your
products. On the other hand you dont need
SAM to calculate labour productivity. Factories
those dont have industrial engineering
department and dont calculate garment SAM
are not in position to measure accurate line
efficiency. For them productivity measure is
one that they can follow.

 Both have importance understating factorys

performance. In case a factory have multiple stitching
lines and all lines are producing same products/design
without any variation in construction and all line has same
number of manpower, in such case labour productivity
measure is enough to compare performance between the
two lines. But how will you compare if these two lines are
making two different products? And have different number
of manpower. With productivity data you couldnt do that.
In such situation line efficiency in the only measure to
compare production performance of these two lines.

 A case is shown in the following for calculating labour

productivity and line efficiency.
A line of 35 operators and 5 helpers produced 400 pieces
in day of 8 hours shift. Garment SAM is 25 minutes.
Considering helpers SAM is included in garment SAM.
Total labour input (A) = 35+5 = 40 labours
Total production (B) = 400 pieces of garments
Total SAM produced (C) = 400 pieces * 25 minutes =
10000 minutes
Total Minutes attended (worked) by all workers (D) = 40
workers * 8 hours shift * 60 = (40 *8 *60) minutes

 Labour productivity = B/A =400/40 =

10 pieces per labour per shift
Line Efficiency = (C/D)*100 = (10000
*100) / (40 * 8 * 60)
= (1000000 /19,200) % = 52.08%
Hence line efficiency is 59.52%. This
is derived from (400*25*100)/
(35*8*60)

Capital productivity
Significant differences in capital productivity exist
across nations. This report suggests that US capital
productivity exceeds Germany's and Japan's because
managers in the US have greater incentives and face
stronger market pressures.
Capital productivity is an important factor in
explaining material standards of living and is at the
heart of determining rates of return. MGI's study
seeks to understand the causes of capital productivity
differences at the industry level to determine the
relative importance of particular product, capital, and
labor market factors in an economy's growth.

Aggregate capital productivity

US businesses have been using physical capital more
efficiently and effectively than those in Germany or
Japan. Each of the latter two's rates of capital
productivity were about 35 percent lower than
America's.
Automotive sector
Lean production has been critical to higher capital
productivity for the automotive sector. Furthermore,
superior overall organization of production through
automation can benefit both labor and capital
productivity. The spread of innovation at various speeds
goes a long way in explaining discrepancies in capital
productivity.

Processed food sector

Capacity utilization is a major driver

in determining productivity in the
processed food sector. Product and
capital markets function jointly to
pressure managers to improve
productivity.

General merchandise retailing sector

By actively introducing new formats

and excelling at merchandising, the
US creates high levels of value added
for given sales volume. While
Japanese managers could improve
productivity levels by affecting
factors under their control, external
barriers have the effect of stifling
competition and hurting innovation.

Telecommunications sector

Marketing and customer orientation

have a strong impact on capital
productivity in the telecom sector by
stimulating demand on the utilization
of fixed assets and ensuring
effectiveness of capital spending.
Lack of separation between regulator
and owner also has a clear impact in
terms of productivity performance.

Electric utilities

Pricing is particularly important for

strong productivity in the electric
utilities sector in terms of stimulating
demand, which in turn improves the
utilization of a fixed asset base, and
managing demand volatility. In
addition, even in monopoly
situations, the right incentive system
for management can improve
productivity.

Capital productivity and financial performance

Rates of return in the US are

consistently higher than in Germany
for both measures of financial
performance and for all time periods
between 1974 and 1993. For the
average of that same period of time,
the rates of return for the US were
also higher than in Japan.

Implications

MGI's results show that most of the

productivity differences between the countries
studied can be explained by controlled
decisions at the firm level. To respond, firms
need to establish clear performance goals,
pursue global opportunities, improve
management, and increase investor pressure.
The implications of not making the necessary
changes are that each country risks
undermining the standard of living for its
citizens.

 There are a number of different

measures ofproductivitywhich a
business can employ. The suitability
of a particular measure will depend,
on thenature of the business, and
the emphasis it places on
particularfactors of production/
inputs. We shall therefore consider
each of the most commonly used
measures here, which we have

 Productivity Measurement
Categories
Partial FactorProductivity Ratios
typeof input Which measure the
production efficiency in respect ofone
Multi-FactorProductivity Ratios Which
seek to account for productivity
acrossallinputs.

 Partial FactorProductivity Ratios

CapitalProductivity

 More, and more, businesses are

becomingcapitalintensive, in that
hugecapital expenditureonfixed
assetsis required in order to
operate. The problem presented here
is that the units for
bothoutputandinputneed to be
comparable for the result to be
meaningful. Simply counting the
number of cars produced in the

 floor assembly line and counting the

number of machines, regardless of
their type, that have been used in
the period is not appropriate. Instead
businesses normally attach a
financial value to both output
andcapital employed. This too
poses questions,

 Should the age of machinery and

thereforedepreciationof fixed assets be accounted
for ?

How should output be valued, atcost of
production, or atsales price?

If Sales Price, and thus Sales Revenue, is used we can
see that it would be relatively easy to generate an
apparent increase inCapital Productivityby raising
theUnit Sales Price, even though in reality
productivity has not changed.

MaterialProductivity

Material Productivity Formula

 As withcapital productivitymeasures,
businesses who seek to monitor the efficient
use made ofmaterialswill attach a value to
both output and materials - normally at
theirpurchase price. Here a further concern
ismatchingmaterial usage with output.
Many firms will be left withstock of raw
materialsandwork-in-progressat the end
of the period, and consideration needs to be
given as to whether their value should be
included or excluded from calculations.

 Partial FactorProductivity Ratios can easily

distort the measurement of productivity. Take
for exampleLabour Productivity, if indirect
staff are excluded, and only assembly line
workers are accounted for, and the number of
administration staff is increased this would not
be reflected in the Labour Productivity Ratio,
but would of course effect the overall
productivity of the business as more inputs of
labour are being consumed by the business.

 If the company embarked on huge

investment in automation of the
assembly line, labour productivity
might well increase - assisted by the
new machinery. However, this
improved figure would not reflect the
increased levels ofCapitalnow
being employed in production.

 For these reasonsPartial

FactorRatios are best applied as a
set in conjunction with each other,
instead of a firm relying on just one
measure. Thus if increases inlabour
productivityare caused by rushing
work through the plant with little
attention paid towastageof
materials, this will be flagged up by a
poorerMaterialProductivity Ratio.

Multi-factorProductivity Ratios

In order to overcome the problems

presented by the blinkered approach
ofPartial FactorRatios, measures
have been developed which take a
wider perspective on productivity, by
attempting to include the majority of
input, an example of one suchMultifactorProductivity Ratio is given
below

Example ofMultifactorProductivity Formula

 The above ratio takes into account thegains,

andlosses, in productivity across all inputs,
and therefore provides a
moreholisticmeasure of productivity.
However, it should be noted that the problems
referred to above, ofquantifyingOutput,
Labour, Material, and Capital, are still present
here, and need to be considered carefully
before meaningful results can be generated.

'Physical Capital'
Physical capital is one of the three
mainfactors of productionin
economic theory. It consists of
manmade goods that assist in the
production process, like machinery,
office supplies, transportation and
computers.

BREAKING DOWN 'Physical Capital'

In economic theory, factors of production are the

inputs needed to engage in the production of
goods or services in pursuit ofprofit. Economists
have sometimes disagreed about the exact
contours of each category, but there are generally
said to be three main factors of production:
Land or natural resources: This is both the land on
which factories, shipping facilities or stores are
built and the natural resources of a production
process, like the corn needed to make tortilla chips
or the iron ore which is used to make steel.

 Human capital: This includes labor as

well as other resources that humans
can provide - education, experience
or unique skills - which contribute to
the production process.
Physical capital: Manmade goods
which enable the production process,
like machinery, buildings, computers
and other goods needed for the
production process to run smoothly.

 New orstartupcompanies have to invest in

physical capital early in their lifecycle, often
before they have produced a single good
orlanded a single client. This can have many
different applications. For example, a company
that manufactures microwave ovens will have to
make a series of investments before it can expect
to sell a single microwave; it must build a factory,
purchase the machinery it needs to manufacture
the product and it must manufacture some
sample microwaves before convincing any stores
to carry their product.

 The accumulation of physical capital with

establishedfirmscan make the investment required
to catch up a majorbarrier to entryfor new
companies, especially in manufacturing-intensive
industries. The diversification of physical capital is a
good way to judge how diversified a particular
industry is. From the perspective of physical capital,
starting a new law firm is much easier than opening
a new manufacturing plant - theoretically, an
attorney would only need an office, a phone and a
computer. Consequently, law firms outnumber steel
manufacturers by a significantmargin.

 It has long been agreed that physical capital is an

important consideration in a company's valuation,
but it is also one of the most difficult assets to
evaluate. It is consideredfixed capital, which is
appropriate in that something like manufacturing
machinery has long-term value and is relatively
illiquid, since it is usually only designed to fulfill a
particular purpose. On the other hand, the value
of physical capital can change over the years, or
can increase in value with upgrades to theasset
itself or with changes to the firm that affect its
value

Capital Productivity

Outputperunitofvalueoffixedprod
uctionassets(fixedcapital).Inasoci
alisteconomy,capitalproductivitych
aracterizestheefficiencywithwhichfi
xedcapitalstockisused.Itiscommo
nlyemployedineconomicanalysisa
ndintheformulationofproductionpl
ansandplansforcapitalexpenditure
s,bothforthenationaleconomyasa
wholeandforindividualsectors,prod

 Dataonthegrosssocialproductandonnationalincom
e(fromproductiveactivities)areusedincalculatingca
pitalproductivityforthenationaleconomyasawhole;f
orcalculatingtheproductivityofindividualsectors,dat
aongross(commodity)ornetoutputareused.Insector
swheretheoutputishomogeneous(petroleum,coal,c
ement),physicalunitsaresometimesusedinthecalcul
ations.Capitalproductivityiscalculatedonthebasisof
thebalancevaluationofthefixedproductionassets(de
preciationcostsincluded),usingeithertheaverageval
ueovertheyearorthevalueasoftheendoftheyear.
Capitalproductivityisthereciprocalofthecapitaloutputratio.

 Capitalproductivitydiffersfromonebranchofmaterial
productiontoanother.Thus,thenationalincomeprod
ucedincurrentpricesperrubleoffixedproductionass
etsintheUSSRin1975amountedto45kopeksinthe
nationaleconomyasawhole,50kopeksinindustry,36
kopeksinagriculture,13.4kopeksintransportandco
mmunications,and1.18rublesinconstruction.Producti
vityisinfluencedbyanumberoffactors.Itsgrowthde
pendsprimarilyontheleveloftechnology,theorganiz
ationalandtechnicalmeasuresemployedinmanaging
productioncapacities,andtheproportionofcapitalin
vestmentearmarkedforreconstructionandretooling.

 Manyfactorsacttolowerproductivity.Forexample,theaccelerateddevel
opmentofindustrialbrancheswithrelativelylow
capitalproductivitiesmaylowerproductivityforindustryasawhole.The
expansionofproductioninthecountryseastern
andnorthernregionshasthesameeffectbecausethecostoffixedcapita
lstockisbetween30and50percenthigherthere
thanintheEuropeanpartoftheUSSR.Variouspurificationfacilitiesinclud
edinindustrialprojectswhichdonotdirectly
influencethevolumeofproductionneverthelessraisethetotalcostofthe
fixedcapitalstock,therebyloweringcapita
productivity.Theworkingofmineraldepositsatgreaterdepthsrequiresa
dditionalexpendituresinfixedcapital,againleading
tolowerproductivity.Thelevelofcapitalproductivityandthepatternofc
hangesinproductivitydependinlargemeasureon
technicalandeconomicindicatorsdescribingtheutilizationofmachinery
andequipmentandespeciallyonincreasesinthe equipmentshiftindex.
Capitalproductivityhasfluctuatedovertheyearsbecauseitissimultane
ouslyinfluencedbyavarietyoffactors.Thus,
capitalproductivityinindustryintheUSSRrosethroughthe1950sandd
eclinedbetween1961and1965.Duringtheeighth five-yearplan(1966
70),productivityshowednochangewithregardtogrossoutputbutincre
asedwithregardtonetoutput. Duringtheninthfive-yearplan,

 therewasaslightdecline(by3percent),cau
sedprimarilybyconstructionprograms
launchedinthecountryseasternandnorther
nregions,bythedeteriorationofgeologicala
ndminingconditionsinthe
existingmineraldeposits,andbydifficultiese
ncounteredinsupplyinglightindustryandth
efoodprocessingindustrywith
agriculturalrawmaterialsbecauseofextreme
lyadverseweatherconditionsoveranumber
ofyears.Improveduseoffixed
capitalstockisreflectednotonlyinhigherca
pitalproductivitybutalsoinhigherlaborprod
uctivity

 lowerproductioncosts,
andimprovedproductquality.Thus,ifoutlays
foradditionalfixedcapitalstockcanberecou
pedintheperiodprescribedby
norms,theinvestmentiseconomicallywarran
tedevenifcapitalproductivityisslightlylower
ed.Theraisingofcapital
productivityleadstoincreasedefficiencyofpr
oduction.Fiveyearplansmakeprovisionforbetteruseoffix
edcapitalstock
andforthedevelopmentandimplementation
ofprogramstoraisecapitalproductivityinvar
ioussectorsofthenational
economy,atenterprises,andinorganizations.

Capital-Labor Ratio

insocialisteconomics,anindicatorth
atcharacterizesthequantityoffixed
productionassetsinbranchesofmat
erialproductiononaperworkerbasis.Theratioisobtainedby
dividingthebookvalueoftheseass
etsforagivenyearbythenumberof
workersemployedduringthatyear.A
llowancesaremadeinthetotalsfor
workers(andassets)employedforon

Thecapital-laborratio
isusedineconomicanalysisandplanning.Ratiosvaryfrom
industrytoindustryowingtodifferences
inproductionprocessesandinengineeringanddesignfeat
uresandpricesoffixedcapitalstock.In1975,thecapitallabor
ratioforindustryasawholeintheUSSRwasapproximatel
y9,000rubles;onkolkhozes,sovkhozes,andotherstate
agriculturalenterprises,itwas6,200rubles.Differencesin
theratioareevenmorepronouncedbetweenthevarious
branchesofindustry.Inthesameyear,therewere3,000ru
blesofcapitalforeachworkerinlightindustry,22,000rubl
esper
workerinferrousmetallurgy,andalmost96,000rublesper
workerintheoil-extractionindustry.

Theriseofthecapitallaborratio
isanobjectiveeconomicprocessbro
ughtaboutbythequantitativeandq
ualitativegrowthofthemeansoflabo
r.Thisrise,whichischaracteristicof
all

Table1.GrowthinthecapitallaborratiosinbranchesoftheUSSRnationaleconomy

1970
1975
Industryasawhole.
..............
Electricpowergener
ation...............
Fuelproduction.......
........
Ferrousmetallurgy..
.............
Machinebuildingan
dmetalworking.......
........
Lightindustry.........
......
Foodprocessing......
.........
Agriculture.............
..

134

190

158

214

156

243

140

196

130

183

138

198

133

191

156

265

Branchesofmaterialproduction,reflectsincr
easesintheleveloftechnologyandtheever
greatersubstitutionofmachines
forhumanlabor

Thegrowthofthecapitallaborratiohasbeenespeciallyrapid
withinthecontextofthescientifican
dtechnologicalrevolution,whennew
typesofequipmentwithhigherunitc
apacitiesandproductiontechniques
promotingfurtherautomationhaveb
eenintroducedonabroadscale.Bet
ween1965and1975

Forexample
Thenumberofmechanized
productionlinesinUSSRindustryincreasedbyafactorof2
.7,andthenumberofautomaticlinesincreasedbyafactor
of2.9;thenumberoftotallymechanizedandautomatedpl
antshopsandproductionprocessestripled,andthenumbe
roffully
automatedenterprisesincreasedbyafactorof2.8.Manyt
ypesofoperationsthatwerepreviouslyperformedmanuall
y,
particularlyintheextractiveindustry,havebeenvirtuallyo
rtotallymechanized.Themostrapidincreaseinthecapital
-labor ratiohasbeenseeninagriculture,wherealargescaleacquisitionofnewequipmenthasmadepossibleincr
eased productionwithasmallerworkforce.

 Theriseinthecapitallaborratiostemsnotonlyfromtherapidan
dthoroughgoingintroductionofsystemsfo
rthemechanizationandautomationofbasi
cproductionoperations.Alsoimportantist
heapplicationoftechnologytothecontrolo
fproductionprocesses.Ariseinthecapitallaborratioincreasestheproductivityoflab
or,makesproductionmoreprofitable,reduc
esunitcosts,andimprovesproductquality.

 ThegrowthincapitallaborratiosintheUSSRnationaleconomyf
rom1970to1975isillustratedbythedata
inTable1(inpercent;1965=100percent).
Economicgainsaremaximizedwhenlabor
productivitygrowsfasterthanthecapitallaborratio.Insuchacase,theriseoftheca
pitallaborratioisaccompaniedbyanincreasei
ncapitalproductivity.

Capital-Output Ratio

Thevalueoffixedproductionassetsperunitofou
tput.Insocialisteconomies,thecapitaloutputratioisusedineconomic
analysisandinformulatingproductionandcapital
constructionplansforthenationaleconomyasa
wholeandforindividual
sectorsandenterprises(associations).Dataonth
egrosssocialproductandtheproducednationali
ncomecanbeusedto analyzethecapitaloutputratioofthenationaleconomy,whiledatao
ngross(market)ornetoutputcanbeusedtoanal
yze theratiosofindividualsectors.

 Adistinctionismadebetweenthedirectandth
efullcapitaloutputratio.Thedirectratioiscalc
ulatedastheratioofthe
fixedassetsofagivensectortothatsectorsou
tputinmonetaryterms.Thefullcapitaloutputratiotakesintoaccountnot
onlythefixedassetsthataredirectlyinvolvedi
ntheoutputofasectorbutalsotheassetsfunc
tioninginsectorsthatfigure
indirectlyinproduction.Coefficientsofthefullc
apitaloutputratiowerecalculatedforthefirsttimedu
ringthepreparationof

 Therelationshipbetweenthefulland
directcapitaloutputratiosvariesfromsectortose
ctor;itisdeterminedbythenatureof
productionandofintersectorial
relations.Thedirectcapitaloutputratioisinverselyproportional
tocapitalproductivity

Economics, Construction

intheUSSR,thebranchofeconomics
thatstudiespatternsofdevelopmen
tandtheeffectivenessofcapitalcon
struction.
BeforetheGreatPatrioticWarof194
1
45,constructioneconomicswasrega
rdedaspartofthescienceoforganiz
ationof
constructionproduction;onlyinthep

 Constructioneconomicsdealswithquestionsoftheorgani
zationalformsofmanagement(specialization,cooperation
,
concentration,combination,andthecreationofproduction
associations)andtheplanningofcapitalinvestmentand
constructionproduction(forecastingandlong-range,fiveyear,oneyear,androutineoperationalplanningofstructure,
location,andeconomicregionalization).Animportanttask
ofthedisciplineistosubstantiatethetransitiontothepla
nning
andevaluationoftheperformanceofconstructionorganiz
ationsonthebasisofprojectsthatarefinished,turnedove
rtothe customer,andreadytooperate.

 Constructioneconomicsconductsresearchintheecono
micefficiencyofcapitalinvestmentsandofscientifican
dtechnologicalprogressinconstruction(factors,criteria,
indicators,andplannedstandards)asthedecisiveprer
equisiteforincreasinglaborandcapitalproductivity,imp
rovingtheutilizationofmaterialresources,accelerating
thegrowthofproductioncapacities(primarilyasaresult
ofthereconstruction,technicalreequipping,andmoder
nizationofenterprises),achievingtheearliestpossibleu
seofnewproductioncapacities,andattainingprojected
technologicalandeconomicindicators.
Constructioneconomicsworksouttheeconomicprincipl
esunderlyingconstructionplanning,thestandardization
ofconstructionwork,theindustrializationofconstructio
n(withdueregardtotime,ecology,urbanplanning,and
thesocialandeconomicimpact),andtheloweringofest
imatedcostsandcapitalinvestmentsperunitofoutput.
Animportantfunctionofthedisciplineistodevelopasy
stemofinterrelatedcostandphysicalstandards

 (planning,production,estimated,

accounting,andstatisticalstandards)forthetechnologicaland
economicregulationandmanagementofconstruction
productioninallphasesoftheinvestmentprocess.
Constructioneconomicsstudiestheresourcesofcapitalconstru
ctionandtheeffectivenessoftheirutilization,including
questionsrelatingtothedevelopmentofthematerialandtechn
icalbasis,fixedcapitalstockanditsreproduction,the
creationofnormativecirculatingcapitalintheconstructionindu
stry,thetrainingandutilizationofpersonnel,theorganization
andimprovementoflaborproductivity,theimprovementofthe
wagesystem,andtheorganizationofthesystemofmaterial
andtechnicalsupply.
Constructioneconomicssubstantiateseconomicmethodsofma
nagementandincentiveincapitalconstruction:profit-andlossaccounting(economicaccountability),financingandcrediti
ngofconstruction,andthesystemofmutualsettlementsof
accountsbetweenparticipantsintheconstructionprocess,ste
mmingfromeffortstobolstertheroleofeconomicincentive
intheaccelerationofscientificandtechnologicalprogress.

Economic Efficiency of Capital

Investments
anindicatorthatprovidesapictureoftheplannedconnectionsandq
uantitativerelationsbetweentheexpendituresof
socialistsocietyforexpansionandsimplereproductionoffixedcapita
lstockandtheresultsobtained.Thedirectresultof
capitalinvestmentisthatproductioncapacitiesandnonproductionfa
cilitiesareputintooperation;theeventualresultisgrowthinoutput
andmaterialservicesand,ultimately,agrowthinnationalincome.
ThetheoriesandtechniquesdevisedbySovieteconomistsfordeter
miningtheeconomicefficiencyofcapitalinvestments
provideabasisforselectingtheoptimalalternativesofcapitalinvest
mentswhendrawinguplong-termandcurrent(annual
orquarterly)plansandplansforspecificprojects;theyplayadirectr
oleinthemanagementofenterprises(associations),branchesofthe
economy,andintegratedprogramswithparticulargoalsforeconomi
cdevelopment.

 The
StandardMethodsfortheDeterminationo
ftheEconomicEfficiencyofCapitalInvest
mentpermitbranchesoftheeconomy
toadjustthestandardcoefficientofcomp
arativeefficiencyforthenationaleconom
ythatappearsintheirinstructionsfor
determiningeconomicefficiency;suchadj
ustmentstakeintoaccounttheparticular
featuresofthevariousbranchesofthe
economyorregionsofthecountry,sucha
sdifferencesinwages,inthetechnologic
almakeupofassets,inindirect
economiceffects,andinclimate.

 TheStandardMethodscallforamethodof
discountingbasedoncompoundinterestto
relateexpendituresmadeatvarious
timestoaparticularperiod.Theplannedst
andardfordiscountingreflectstheaverage
accumulationofcapitalforthe
nationaleconomyinrelationtoproductiona
ssetsandisthereforeinaccordancewithth
erateofgrowthofsocialproduction.
Capitalinvestmentattheendofthefirstye
ar,togetherwithitsincrement,becomesC(
1+B),which,whenreinvested,
becomesC(1+B)
(1+B),orC(1+B)2,bytheendoftheseco
ndyear;bytheendofthenthyearthefigur
ebecomesC(1+B)n.

Investmentsinthenthyearmaybeconvertedin
tothoseofthefirstyearbydividingthelaterfigu
reby(1+B)nor multiplyingitby1/
(1+B)n.Inthismethodofdiscountingtheoptim
alinvestmentsisthatinwhichthetotaldiscount
ed
capitalinvestmentsandcurrentexpendituresare
,otherthingsbeingequal,thelowest;acommon
measurecanthenbe
appliedtoinvestmentsmadeatdifferenttimes,a
ndtheinvestmentscanbecomparedandadded.

Economic Efficiency of Socialist Production

oneofthemostimportantindicatorsofsocialisteco
nomicdevelopment;theratiooftheusefulresult(e
ffect)tothe expenditures
determinedforthenationaleconomy,branchesoft
heeconomy,andindividualfactories
requiredtoachieve
thatresult.Severalindexesoftheeconomicefficien
cyofsocialistproductionmaybedeterminedbyco
mparingtypesof
expendituresfortheproductionofoutputorforthe
provisionofmaterialserviceswiththeusefuleffect.
Suchindexesare
helpfulinthequantitativeandqualitativeanalysiso
ftheeconomyasawholeorofitsvarioussubdivisio
nsandareusedin theplanningandday-to

Indexesofeconomicefficiencyare
conventionallydividedintothree
groups

Thefirstcomprisesgeneralindexesof
economicefficiency,themostimportantofwhichi
sthegrowthofthesocialproductivityoflabor.This
growthmaybe
expressedquantitativelyinthegrowthofoutputan
dinabsolutesavingsoflivingandembodiedlabor,
measuredintermsof
valueandinphysicalterms.Theresultsofproducti
onaremostcompletelyrepresentedinthefinalso
cialproductand nationalincome(netoutput)(see
TOTALSOCIALPRODUCT).Overallprofitabilityisals
oconsideredageneralindex.

Thesecondgroupofindexe
s
consistsofthebasicindexesofeconomicefficienc
yintheuseofsuchproductionresources
aslivinglabor,fixedproductionassets,expenditur
esofmaterials,andcapitalinvestments.Thesein
dexes,whichare
computedonthebasisofnationalincome(netout
put),includetheproductivityoflivinglabor(labor
input),capital-output
ratio(capitalproductivity),consumptionofmateri
als(materialsoutputratio),andreturnoncapitalinvestments(c
apital intensity).

Thethirdgroupofindexes
comprisestechnologicaleconomicindexesofefficiencyintheuseofresou
rces.Theseindexes
areusedintheanalysisandplanningofseverala
spectsoftheproductionprocessandinthecalcul
ationoffactorsof
productiongrowthatenterprises,branchesofind
ustry,andinagriculture,construction,trade,and
transportation.Thethird
groupofindexesincludesindividualoutput;coeffi
cientsoftheuseofthemeansoflaborandofthe
capacityofmachinery
units;expendituresofrawmaterials,supplies,fue
l,andenergyperunitofoutput;andpayoffperiod
,discounted

Fixed Capital Stock

withinthenationaleconomy,theaggregateofmateria
lassetsproducedbysociallaborandoperatingforan
extendedperiod
oftime.Fixedcapitalstockincludesbuildings,installati
ons,transmissiondevices,machinery,equipment,me
ansof
transport,tools,productionandsalesimplements,draf
tanimals,andcommerciallivestock.Fixedcapitalthat
functionsin
thesphereofmaterialproductionisfixedproductionc
apital;fixedcapitalthatdoesnotactdirectlyinthepro
ductionprocess
constitutesfixednonproductioncapital.

 Thefixedcapitalstockofthenationaleconomyisthe
mostimportantandfastestgrowingcomponentofnat
ionalwealth.In
theUSSRasofJan.1,1976,fixedcapitalstockmeasu
redbycomparativepricesequaled1.258trillionruble
s;806billion
rublesofthissum,or64.1percent,representedprodu
ctioncapitaland452billion,or35.9percent,nonprod
uctioncapital.
Thegrowthanddevelopmentofthefixedcapitalstoc
karekeyconditionsforcreatingthematerialandtec
hnicalbaseofa
communistsocietyandforsteadilyraisingthewellbeingofthepeople.Thefixedcapitalstockisreflecte
dinmonetary
termsasthebalanceoffixedcapital,usuallyreferred
toastotalfixedassets

 inasocialisteconomy,theaggregateofthefixedproducti
onassetsofenterprisesandassociationsandoftheecono
my's
nonproductionfixedassets.AsofJan.1,1976,thefixedca
pitalstock(includinglivestock)oftheUSSRamountedto1
,258billionrubles,ofwhich806billionrublesrepresented
fixedproductionassets,and452billionrublesnonproducti
onfixed
assets.ThedistributionoftheUSSRfixedcapitalstockas
ofJan.1,1976,isgiveninTable1.
Thedevelopmentofproductionundersocialismandincrea
sesineconomicefficiencyaretoaconsiderabledegree
associatedwiththemorerationaluseoffixedcapitalstoc
kasthematerialandtechnicalbaseofallsectorsofthen
ational
economy.Improvementsintheuseofcapitalstockarerefl
ectedincapitalproductivity.Fixedcapitalstockincludesth
e
fixedassetsofstate,cooperative,andpublicenterprisesa
ndorganizationsand

Table1.DistributionofUSSRfixedcapitalstock(inpercent,Jan.1,
1976)
Fixedproductionassets

Industry...............
30.6
Agriculture...............
13.4
Transport...............
12.6
Communications...............
1.0
Construction...............
2.8
Commerce,thefoodserviceindus
3.7
try,andotherproductivesectors.
..............
Subtotal...............
64.1
Nonproductionfixedassets

Housing...............
21.3
Municipalandeverydayservices..
4.4
.............
Publichealth,education,science,
10.2
thearts,andothernonproductiv
esectors...............
Subtotal...............
35.9
Total...............
100.0

kolkhozes;italsoincludeshouses,farmbuildings,c
ultivatedperennialplants,work stock,a
Pricing

theestablishmentofprices,pricelevels,a
ndpricerelationships.
Inpresocialistformations,thepricingproc
esstakesplacespontaneously,throughth
emarket,inthecourseofcompetition
betweencommodityproducers.Beingsubj
ecttothelawofvalueandthelawofsupp
lyanddemand,themarketpricesof
commoditiesconstantlydeviatefromvalu
e.

 Undercapitalism,thechangingvaluesofcommoditiesand
changingvalueproportionshaveadecisiveeffectonprice
dynamics.Thegrowingproductivityoflaborandreducede
xpendituresofactualandembodiedlaborperunitofusev
alueare
majorfactorsinreducingthecostofcommodities.Inthew
ordsofK.Marx,ifwesetasideindividualcounter acting
influences...,thetendencyandtheresultofthecapitalist
modeofproductionaretoconstantlyraiselaborproductivit
yand
consequently...toeffecttheconstantdistributionofnewl
yaddedlaboroveragreatervolumeofoutput,thusloweri
ngthe
priceofindividualcommoditiesorloweringcommoditypric
esingeneral(K.MarxandF.Engels,Soch.,2nded.,vol.4
9,p.15).Intheirquestforexcesssurplusvalue,capitalists
seektoreduceindividualproductioncostsandtolowerpric
esin
ordertocrowdoutcompetitorsandexpandsalesmarketsf
ortheircommodities.

Thecapitalistpricing
mechanismundergoessubstantivechangesin
thestageofimperialism.Monopoliesconclud
ecartel
agreementsonprices;theysellgoodsatmon
opolisticallyestablishedhighpricesandbuyr
awmaterialsatmonopolistically
establishedlowones.Theyoffsetthepricered
uctionsthataccompanyreducedproductionc
ostsorthatoccurduring
recoveryfromacrisis.Monopolypricesaresu
stainedbystate-monopolyregulation.

 .Thedominanttrendatthisstageisthe
inflationaryriseofprices,whichmadeaquantumleapin
thefirsthalfofthe1970s(Table1).
Theinflationaryriseofpricesintensifiesthecontradiction
sinherentinthecapitalisteconomicsystemandreflects
thedecay
ofcapitalismintheperiodofitsgeneralcrisis.Risingpric
esrepresentaparticularlyheavyburdenfortheworking
people,
resultinginthereductionoftheirrealincomeandaffectin
gtheoperationoftheeconomiclawsofcapitalismitself.
Reductionsinthecostofcommoditiesarenotaccompani
edbyreductionsintheoverall

Table1.Inflationarypricerisesinsomecapitalistcountries
andontheworldmarket

1950

1960

November1976

Secondquarterof1976

Thirdquarterof1976

1965

1970

1975

1976

Consumerpri
ceindex(196
3=100)

USA.............
..

79

97

103

127

176

186

GreatBritain 61
...............
France......... 53
......
FederalRepu 77
blicofGerma
ny...............
Italy............ 65
...
Japan.......... 54
.....
Worldexport
priceindex(
1950=100)
Allcommodit 89
ies..............
.
Rawmaterial 103
s...............
food............ 95
...
agricultural 78
nonfood......
.........
minerals...... 90
.........
Nonferrous
metals.........
......
Finishedpro 79
ducts..........
.....

91

108

135

249

290

92

106

131

200

219

92

106

120

162

169

87

111

128

219

2761

80

111

144

248

271

100

103

113

244

2402

99

103

108

326

3383

94

103

111

243

2423

105

103

101

198

2273

100

104

111

548

5633

106

135

180

202

2543

98

103

117

213

2123

 pricelevel,eventhoughindividualcommoditypric
esmaydrop.Intimesofcrisisthemonopoliespref
erproductioncut
backstoppricereductions.Pricingissubjecttoincr
easingstateinterventioninthemonopoliesintere
st.
Inflationarypricerisesarealsoobservedinthedev
elopingcountries(Table2).Inthedevelopingcount
riesthatareruledby
democraticforces,measuresaretakentolimitsuc
hpriceincreasesandtomonitorpricingprocedure
sandpractices.

 Pricingpolicyandpracticeundergoradicalchangeswit
hthetransitiontosocialism.Intheperiodoftransition
from
capitalismtosocialismtheproletarianstatefullycontr
olsthepricingmechanismandeffectivelyusesitasat
ooltorestrict
andcrowdoutthebourgeoisie,totransformthesmallscalecommoditysystem,todevelopandconsolidatet
hesocialist
economy,andtoraisethelivingstandardofthelabori
ngmasses.V.I.LeninregardedtheactivityoftheSovi
etstateinthere alm

Plannedpricing
isaneconomicmanagementtoolwieldedbytheso
cialiststate;itisbasedonpublicownershipofthe
meansofproductionandtheplanneddevelopment
oftheeconomy,anditmakesdeliberateuseofthe
systemofeconomic
laws,includingthelawofvalue.Plannedpricingcon
sistsindevelopingbasicpricingfactors,settingpric
esforthemost
importantcategoriesofgoodsandservices,andpla
nningthechangestobemadeinthelevels,relation
ships,and
structuresofprices.Plannedpricingundersocialism
includestheestablishmentofprices(drafting,revie
w,andratification
ofpricelistsandprojectedpricesofnewproducts);
priceplanningandforecasting;coordination(reconc
iliation)oftheprices

Thefollowingarethebasicprinciplesofplannedpricingundersocialism.

(1)Pricesareapproximatelyequaltothesociallynecessaryex
pendituresoflabor,andchangesinthelevelsand
proportionsofsuchexpendituresarepromptlyreflectedinthe
pricesystem.Plannedpricesarestableandnotsubjectto
marketfluctuations.Atthesametime,pricesareperiodicallyr
eviewedtoreflectsubstantiveandsteadychangesin
productionandsales.
(2)Pricesaredeliberatelyusedtostimulatescientificandtech
nologicaladvancesandtoimproveproductqualitythrough
pricedifferentiation.Thepricingofnewtechnologyconformst
otheprincipleofitsrelativelylowercost:insettingwholes ale
pricesfornewproductsespeciallymachineryandequipment
thepricelevelistobereducedperunitofeffective
performance(seeMateriallyXXVsezdaKPSS,1976,p.173).

 (3)Pricesareusedtostimulatetheefficient
useofproductiveresources
namely,toincreaselaborproductivityands
ave laborresources,toreducethematerialintensiveness,ormaterialsoutputratio,andincreasecapitalproductivi
ty,toenhance
therationaluseofnaturalresources,toens
urecomprehensiverecoveryofnaturalraw
materials,andtoreducetheextentof
environmentaldamage.Pricesareincreasin
glyfaithfulreflectionsoftheexpenditurest
hataresociallynecessaryforthe
discovery,reproduction,andpreservationof
naturalresources.

 (4)Thepricingmechanismisusedtosolvecertainsocioeconomi
cproblemsspecifically,toeliminatesubstantive
differencesbetweentownandcountry,ensuresteadygrowthin
thepopulationsrealincome,andimproveworkingandliving
conditions.Thisprincipleisrealizedbyvariousmeans:(a)throug
htheuseofstatepurchasepricesandpricespaidby
kolkhozesandsovkhozesforthemeansofproduction,whichma
keitfeasible,ineconomicterms,totransformagricultural
laborintoaformofindustriallaborandtoclosethegapbetween
urbanandruralincomelevels;(b)bystabilizingthelevelof
stateretailpricesofbasiccommoditiesandloweringthepriceof
individualcommoditieswhenconditionsmakeitpossibleto
doso;(c)bysettinglowerpricesongoodsandservicesofspecia
lsocialimportance;and(d)bytakingthesocialfactorinto
accountinestablishingpricesfornewtechnology.

 (5)Thepricingmechanismsupportstheinstitutionofthepr
ofit-and-lossaccountingsysteminallpartsofthenational
economy;forthevariousenterprisesandassociations,prici
ngoffersaneconomicincentivetoraiseproductionefficien
cy,
reducetheprimecostofproduction,andpracticeeconomi
es.Thepricingmechanismalsoequalizestheconditionsof
profit-andlossaccountingforenterprisesandassociationsoperating
underunequalobjectiveconditions;thisisaccomplishedby
variousmeans,suchastheuseofaccountingpricesandfix
ed(rent)payments.