Question

3. Which determinant(s) of worker's productivity technology (or more gen- erally total factor productivity) A, physical capital per worker human capital per worker , and/or natural resources per worker †l will be affected and how (increase or decrease) if the government: (a) increases grants for academic research (b) restricts low-skilled labor immigration (c) improves the quality of the health care system (d) attracts foreign direct investment (e) engages in inward-oriented trade policies (f) is ousted by a military coup, which is followed by a civil war

Answer 1

a) Increased grants for academic research will promote research and develop new ways of organizing inputs efficiently. Thus, K/L should will increase as labor is better organized with machines using new research.

b) If low skilled migration is stopped, the total pool of workers will start falling. But since the fall is in low skilled workers, the proportion of skilled workers in total will rise and thus H/L will increase.

c) Improved health care system will make the workers more productive and skillful. The human capital increases thus H/L will increase.

d) with Fdi, there is more competition for domestic firms and bad firms are driven out of the market. Thus the firms will try to organize more efficiently and K/L will increase.

e)Since a lot of capital (K) and technical know-how is imported from abroad, any trade restrictions will reduce both the K/L and H/L.

f) A civil war can greatly destroy the natural resources and capital in a country Thus both N/L and K/L will fall immediately. If the war continues for long, people will be unemployed for long and will start losing their previosu skill set. Thus H/L will also decraese.