The economy has grown by 4% per year over the past 30 years. During the same period, the labor force has grown by 1% per year and the quantity of physical capital has grown by 5% per year. Each 1% increase in physical capital per worker is estimated to increase productivity by 0.4%. Assume that human capital has not changed during the past 30 years. How much has growing physical capital per worker contributed to productivity growth?

Question

Quizplus · Accepted Answer

The growth in physical capital per worker is 4% (5% growth in physical capital - 1% growth in labor force). Each 1% increase in physical capital per worker increases productivity by 0.4%, so 4% * 0.4% = 1.6%.

The Economy Has Grown by 4% Per Year Over the Past