Suppose in an economy the total factor productivity grows by 5%.Annual growth in labor and capital stock equal 2.5% and 1.5% respectively.If the labor force receives 75% of the real GDP, calculate the annual growth in the real GDP of the economy.
A)10 .5%
B)7.25 %
C)5.50 %
D)4.76 %
E)0.05 %

Question

Quizplus · Accepted Answer

The growth rate of real GDP can be calculated using the Solow growth model formula: Growth rate of GDP = (Growth rate of TFP) + (Share of labor * Growth rate of labor) + (Share of capital * Growth rate of capital). Here, TFP growth is 5%, labor growth is 2.5%, capital growth is 1.5%, labor share is 75%, and capital share is 25%. Thus, GDP growth = 5% + (0.75 * 2.5%) + (0.25 * 1.5%) = 7.25%.

Suppose in an Economy the Total Factor Productivity Grows by 5%.Annual