Consider an economy with a two-variable production function with labour-income-share at 2/3 and capital-income-share at 1/3. Assume that growth rate of real GDP is 5%. If both K and L grow at 3%, the growth of total factor productivity will be:

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Quizplus · Accepted Answer

The growth of total factor productivity (TFP) can be calculated using the formula: Growth of TFP = Growth of GDP - (alpha * Growth of Labor) - ((1-alpha) * Growth of Capital), where alpha is the labor-income-share. Substituting the given values: Growth of TFP = 5% - (2/3 * 3%) - (1/3 * 3%) = 5% - 2% - 1% = 2%.

Consider an Economy with a Two-Variable Production Function with Labour-Income-Share