The economy has grown by 4% per year over the past 30 years.During the same period,the labour force has grown by 1% per year and the quantity of physical capital has grown by 5% per year.Each 1% increase in physical capital per worker is estimated to increase productivity by 0.4%.Assume that human capital has not changed during the past 30 years.How much has growing physical capital per worker contributed as a percentage of total productivity growth?

Question

Quizplus · Accepted Answer

To determine how much growing physical capital per worker has contributed to total productivity growth, we can use the formula for productivity growth:

Productivity growth = GDP growth - (Labor force growth + Physical capital growth)

We know that GDP growth is 4% per year, and labor force growth is 1% per year. To calculate physical capital growth, we need to use the fact that a 1% increase in physical capital per worker increases productivity by 0.4%. Therefore, if physical capital is growing at 5% per year, then the increase in productivity due to physical capital growth is:

0.4% x 5% = 2%

So the equation becomes:

Productivity growth = 4% - (1% + 2%)

Productivity growth = 1%

Therefore, growing physical capital per worker has contributed 2/1 = 53% of the total productivity growth.

The Economy Has Grown by 4% Per Year Over the Past