Suppose that the labor force falls by 2 percent, the capital stock rises by 4 percent, and total factor productivity rises by 2 percent. If labor and capital each take a 50 percent share of real GDP, by how much does the economy grow?

Question

Quizplus · Accepted Answer

Using the Solow-Swan growth model, we can use the following formula for economic growth:

% change in real GDP = % change in total factor productivity + 1/2(% change in capital stock) + 1/2(% change in labor force)

Substituting in the given values:

% change in real GDP = 2% + 1/2(4%) + 1/2(-2%)
% change in real GDP = 2% + 2% - 1%
% change in real GDP = 3%

Therefore, the economy grows by 3 percent. The correct answer is (C).

Suppose That the Labor Force Falls by 2 Percent, the Capital