Question

The economy has grown by 4% annually over the past 30 years. During the same period, human capital has grown 1% per year and physical capital has grown 5% per year. Each 1% increase in physical capital per worker is estimated to increase labor productivity by 0.4%. Assuming a Cobb-Douglas production function, how much has annual total factor productivity growth contributed to national output growth (expressed as a percentage of national output growth)

Answer 1

53.3 %

Step-by-step explanation:

Given that

Each 1% increase in physical capital per worker = 0.4% increase in labor productivity

quantity of physical capital grows by 5% per year

labor force grows by 1% per year

therefore the physical capital per labor grows by ; 5% - 1% = 4%

Annual Total factor of productivity = 0.4% * 4% = 1.6%

since output grows by 4% and labor force grows by 1% average labor productivity will grow by ; 3%

Hence annual total factor productivity growth expresses as a percentage of national output growth

= 1.6 / 3 = 53.3%