Suppose the inputs of labour and capital each increase by 10 percent and output also increases by 10 percent. In that case:

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Quizplus · Accepted Answer

The Solow residual measures the portion of output not explained by the input amounts of labor and capital, essentially capturing the effects of technological progress or efficiency gains. If output increases by the same proportion as the inputs (labor and capital), it indicates that the increase in output is fully accounted for by the increase in inputs, with no change in productivity or technology efficiency. Thus, the Solow residual is zero, as there are no unexplained factors contributing to the increase in output.

Suppose the Inputs of Labour and Capital Each Increase by 10