Suppose that the economy grows by 6 percent, total factor productivity grows by 4 percent, and the capital stock increases by 2 percent. If labor and capital are the only inputs and capital contributes 25 percent to GDP, then the labor force has risen by

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The growth accounting equation is: GDP growth = (contribution of capital * growth of capital) + (contribution of labor * growth of labor) + growth of total factor productivity. Given GDP growth is 6%, TFP growth is 4%, capital growth is 2%, and capital contributes 25% to GDP, we solve for labor growth: 6% = (0.25 * 2%) + (0.75 * labor growth) + 4%. Solving gives labor growth = 2%.

Suppose That the Economy Grows by 6 Percent, Total Factor