Module 38
Check Your Understanding- a.Significant technological progress will result in a positive
growth rate of productivity even though physical capital
per worker and human capital per worker are unchanged.
b.Productivity will grow, but due to diminishing marginal
returns, each successive increase in physical capital per
worker results in a smaller increase in productivity than
the one before it. - a.If the economy has grown 3% per year and the labor
force has grown 1% per year, then productivity—output
per worker—has grown at approximately 3% −1%=2%
per year.
b.If physical capital has grown 4% per year and the labor
force has grown 1% per year, then physical capital per
worker has grown at approximately 4% −1%=3% per
year.
c.According to estimates, each 1% rise in physical capital,
other things equal, increases productivity by 0.3%. So, as
physical capital per worker has increased by 3%, produc-
tivity growth that can be attributed to an increase in
physical capital per worker is 0.3 ×3%=0.9%. As a per-
centage of total productivity growth, this is 0.9%/2% ×
100% =45%.
d.If the rest of productivity growth is due to technological
progress, then technological progress has contributed
2%−0.9%=1.1% to productivity growth. As a percent-
age of total productivity growth, this is 1.1%/2% ×100%
=55%. - It will take time for workers to learn how to use the
new computer system and to adjust their routines.
And because there are often setbacks in learning a new
system, such as accidentally erasing your computer files,
productivity at Multinomics may decrease for a period
of time.
Tackle the Test:
Multiple-Choice Questions- e
- a
- d
- e
- b
Tackle the Test:
Free-Response Questions- a.Growing physical capital per worker is responsible for 1%
productivity growth per year. 2% ×0.5=1%
b.There was no growth in total factor productivity because
there was no technological progress. According to the
Rule of 70, over 70 years (from 1940 to 2010), a 1%
growth rate would cause output to double. Real GDP per
capita in this case doubled, as would be expected from a
1% productivity growth rate alone; therefore, there was
no change in technological progress.
Module 37
Check Your Understanding
- Economists want a measure of economic progress that
rises with increases in the living standard of the average
resident of a country. An increase in overall real GDP
does not accurately reflect an increase in an average resi-
dent’s living standard because it does not account for
growth in the number of residents. If, for example, real
GDP rises by 10% but population grows by 20%, the liv-
ing standard of the average resident falls: after the
change, the average resident has only (110/120) × 100 =
91.6% as much real income as before the change.
Similarly, an increase in nominal GDP per capita does
not accurately reflect an increase in living standards
because it does not account for any change in prices. For
example, a 5% increase in nominal GDP per capita gen-
erated by a 5% increase in prices results in no change in
living standards. Real GDP per capita is the only measure
that accounts for both changes in the population and
changes in prices. - Using the Rule of 70, the amount of time it will take
China to double its real GDP per capita is (70/8.8) =
8.0 years; India, (70/4.1) =17.1 years; Ireland, (70/3.9)
=17.9 years; the United States, (70/1.9) =36.8 years;
France, (70/1.5) =46.7 years; and Argentina (70/1.2) =
58.3 years. Since the Rule of 70 can be applied to only a
positive growth rate, we cannot apply it to the case of
Zimbabwe, which experienced negative growth. If India
continues to have a higher growth rate of real GDP per
capita than the United States, then India’s real GDP per
capita will eventually surpass that of the United States. - The United States began growing rapidly over a century
ago, but China and India have begun growing rapidly
only recently. As a result, the living standard of the typi-
cal Chinese or Indian household has not yet caught up
with that of the typical American household.
Tackle the Test:
Multiple-Choice Questions
- d
- c
- c
- b
- b
Tackle the Test:
Free-Response Question
- Increases in real GDP per capita result mostly from
changes in productivity (or labor productivity).
Productivity is defined as output per worker or output per
hour. Increased labor force participation could also lead to
higher real GDP per capita, but the rate of employment
growth is rarely very different from the rate of population
growth, meaning that the corresponding increase in out-
put does not lead to an increase in output per capita.
S-22 SOLUTIONS TO AP REVIEW QUESTIONS