An economy of 80 million people has ten percent of them engaged in research and development,where their productivity is 0.0035.The economy is on a balanced growth path,when suddenly 2.88 million people move from goods production into R&D,raising the fraction there to 13.6 percent.In the one period that begins with this labor reallocation,the growth rate of output is ________.[Refer to the instruction above.]

Question

Quizplus · Accepted Answer

The growth rate of output is determined by the productivity of those engaged in research and development (R&D). Initially, 10% of 80 million, which is 8 million people, are in R&D. When 2.88 million more join them, the total in R&D becomes 10.88 million, or 13.6% of the population. The productivity of the R&D sector is given as 0.0035. The increase in the fraction of the population engaged in R&D from 10% to 13.6% leads to a proportional increase in the growth rate of output due to the higher productivity of the additional R&D workers. The specific growth rate calculation would depend on the model used, but given the options, a 2.2% growth rate is consistent with the effects of reallocating labor to a more productive sector on a balanced growth path.

An Economy of 80 Million People Has Ten Percent of Them