Suppose that an economy grows by 4 percent, total factor productivity grows by 3 percent, and the labor force increases by 6 percent. If labor and capital are the only inputs and labor contributes 40 percent to GDP, then the stock of capital must have _____.

Question

Quizplus · Accepted Answer

The formula for calculating economic growth is:

Economic Growth = Total Factor Productivity (TFP) + [(Labor Input Weight x Labor Input Growth) + (Capital Input Weight x Capital Input Growth)]

Substituting in the given values:

4% = 3% + [(0.4 x 6%) + (0.6 x Capital Input Growth)]

Capital Input Growth = -2.33%

This means that the stock of capital must have fallen by 2.33%. Therefore, the correct answer is (C).

Suppose That an Economy Grows by 4 Percent, Total Factor