Question

Since 1960, Germany's labor force has grown by an average of 0.8% per year, but the average hours that employee work has fallen by 0.8% per year. GDP has grown by an average of 2.4% per year. Public and private investment have increased the capital stock by an average of 1.5% per year, which has contributed an estimated 0.5% per year to growth. Thus, total factor productivity has increased by an annual average of:

A) 0.8%

B)1.5%

C) 1.9%

D) 2.4%

E) 0.5%

Answer 1

Answer

The correct answer is (C) 1.9%.

Total Growth rate of GDP depends on Total Factor productivity , Total Labor hours worked and Total Capital stocks

Here It is given that Total capital stock is contributing 0.5 % to growth of GDP, GDP is growing by 2.4%

Total Labor hours worked = Labor force*number of hours per employee worked.

% change in (A*B) = % change in A + % change in B

=> % change in (Total Labor hours worked) = % change in (Labor force) + % change in (number of hours per employee worked)

= 0.8% + (-0.8%) (here negative sign means that number of hours per employee worked has fallen)

=> % change in (Total Labor hours worked) = 8% + (-8%) = 0

Hence, There is no change in total hours worked.

Thus growth of GDP occurs only due to change in Capital and due to change in total factor productivity.

Hence, % change in GDP = % change in Total Factor productivity + 0.5(It is given that Total capital stock is contributing 0.5 % to growth of GDP)

=> % change in GDP = % change in Total Factor Productivity + 0.5

=> 2.4% = % change in Total Factor Productivity + 0.5

=> % change in Total Factor Productivity = 2.4% - 0.5% = 1.9%

Hence, the correct answer is (C) 1.9%.