Suppose that the economy grows by 4 percent, total factor productivity grows by 1 percent, and the capital stock rises by 2 percent. If both labor and capital take a 50 percent share of real GDP, then the labor force has risen by 2 percent.

Question

Quizplus · Accepted Answer

The equation for calculating the growth rate of real GDP is given by:

%Δreal GDP = %Δtotal factor productivity + %Δcapital stock + %Δlabor force

From the data given, we have:

%Δreal GDP = 4%

%Δtotal factor productivity = 1%

%Δcapital stock = 2%

%Δlabor force = ?

Plugging in the numbers:

4% = 1% + 2% + %Δlabor force

1% + 2% = 3%, so:

4% = 3% + %Δlabor force

%Δlabor force = 1%

Therefore, the labor force has risen by 1%, not 2%. The answer is B.

Suppose That the Economy Grows by 4 Percent, Total Factor