Question

Question#1: Based on the aggregate production function: GDP = F_T (L, K, H)

a. Imagine that the amount of capital K increases by 10% (from 50 to 55 units) while labour and technology stay the same. How much does total GDP and GDP per worker change by? (A specific percentage is not needed, just ‘more than’ / ‘less than’ 10%.)

b. Imagine that capital increases by 5 units again, from 55 to 60. How big is the resulting change in GDP and GDP per worker compared to the change that occurred in part a?

c. What is the term (hint: law) used to describe the relationship between K and GDP in parts a and b?

d. Based on your answers to parts a through c, is it possible to have sustained economic growth due to capital increases alone?

e. Now imagine that the amount of labour L and capital K both increase by 10%. By how much do total GDP and GDP per worker change by?

f. What is the term used to describe this relationship?

g. What is required to have sustained increases in per-worker GDP (which, in turn, results in improving living standards)?

Question#2:

	2013	2017
POPULATION	621,700	624,700
LABOUR FORCE	393,000	383,900
EMPLOYMENT	353,900	352,900
UNEMPLOYMENT	39,100	31,000

a. In 2017, the unemployment rate was 61.45% and 2014 unemployment rate was 63.21%, Did employment go up or down during this period?

b. Based on your answer to question a, can the unemployment rate always provide an accurate sense of how the labour market is performing? Explain.

Answer 1

The GDP function GDP = FT(L,K,H). The notion FT reflects the assumption that change in technology will change the production function.

a. When capital K increases from 50 to 55 which is a 10% increase, the GDP and GDP per capita will increase less than 10%

b.If capital K again increases by 5 from 55 to 60 then the change in GDP and GDP per capita will be smaller than the change in part a.

c. The term than describes the above phenomenon is the Law of diminishing returns.

d. Sustained economic growth is not possible with an increase in capital investment alone.

e. If the amount of Labor and capital increase by 10% then GDP may grow more than 10% but GDP per capita will grow a little if any.

f. balanced growth path. It is when all variables are increasing.

g. According to this model, that is a neoclassical model, change in technology is required to improve the standard of living of workers. Much technological change is embodied in new capital equipment, so the process of investment is central to encouraging technological improvements.

#2

a. The employment actually went down from 353,900 in 2013 to 352,900 in 2017. but the rate of employment will increase because of a decrease in the labor force.

Employment rate = Number of people employed/ Total labor force.

The decrease in the labor force with a decrease in employment but at a lower rate will increase the employment rate.

b. In the above table, unemployment is indeed decreasing but if the labor force decreases and unemployment decrease at a slower rate. The unemployment rate will actually go up. This is why you never get the idea about an economy based on a single statistic. The unemployment rate here is not telling the true picture of the economy.