Question

Suppose that one were to observe an economy in which fluctuations in output and fluctuations in employment are positively correlated. Based upon your answers to parts e and f, can you unambiguously choose either fluctuations in total factor productivity or in consumption utility weight as the source of the fluctuations in output and employment?

Answer 1

I can unambiguously choose fluctuations in total factor productivity as the source of the fluctuations in output and employment.

Step-by-step explanation:

Total factor productivity refers to the measure of economic efficiency based on the ratio of total outputs to total inputs used in the production of goods and services. The total factor productivity is obtained by dividing output by the weighted average of labor and capital input, with the standard weights of 0.7 assigned to labor and 0.3 assigned capital. Increasing total factor productivity in an economy yields higher output with the same resources, and therefore drive economic growth, leading to high levels of employment. Therefore, total factor productivity is contrasted to consumption utility weight, which measures consumers' satisfaction with goods and satisfaction.