Consider an economy with a Cobb-Douglas production function in which capital and labor receive equal shares of national income and labor input is constant. If the capital stock grows by 2% and output grows by 4%,then the most likely explanation is

Question

Quizplus · Accepted Answer

Since labor input is constant and capital input has increased by 2%, the 4% increase in output cannot be solely attributed to the increase in capital stock. Therefore, it is likely that there has been an increase in total factor productivity (TFP) by 2% + X%, where X% is the increase in TFP that is responsible for the remaining 2% of output growth. Thus, the most likely explanation is that TFP has increased by 3%.

Consider an Economy with a Cobb-Douglas Production Function in Which