Question

If output grows at 7%, capital grows at 3%, labor grows at 2%, and the share of labor and capital in the production process is equal (meaning 0.5 each), what is the growth rate in total factor productivity for country A?

Answer 1

The growth rate in total factor productivity for country A is 4.5%, calculated from the given output, capital, and labor growth rates, and their equal shares.

Step-by-step explanation:

The question is related to how we measure the growth rate in total factor productivity (TFP) given certain growth rates for output, capital, and labor, along with their respective shares in the production process.

According to the Cobb-Douglas production function, the TFP growth rate can be calculated using the formula TFP growth = Output growth - (Share of capital × Capital growth + Share of labor × Labor growth). In this case, if output grows at 7%, capital grows at 3%, and labor grows at 2%, and both capital and labor have equal shares of 0.5, the growth rate in TFP for country A is calculated as follows:

TFP growth = 7% - (0.5 × 3% + 0.5 × 2%)

TFP growth = 7% - (1.5% + 1%)

TFP growth = 7% - 2.5%

TFP growth = 4.5%