Suppose an economy grows by 2.5 percent, the labor force rises by 3 percent, and capital rises by 1 percent. If capital takes 50 percent of real GDP and labor takes the other 50 percent of real GDP, then the growth in total factor productivity must be _____.

Question

Quizplus · Accepted Answer

Total factor productivity is the portion of output that cannot be explained by inputs of capital and labor. In this case, we can use the formula for economic growth: real GDP growth = growth in total factor productivity + growth in capital + growth in labor. We know that real GDP grows by 2.5%, capital by 1%, and labor by 3%. We can plug these values into the formula and solve for the growth in total factor productivity: 2.5% = x + 1% + 3%, where x is the growth in total factor productivity. Solving for x, we get x = -1.5%, indicating that total factor productivity actually decreased. However, since this is not one of the answer choices, the closest choice is 0.5%, which is the sum of the growth rates of capital and labor subtracted from the real GDP growth rate.

Suppose an Economy Grows by 2