Question

1. With economic growth accounting, productivity growth (A) in an K economy with an increasing — ratio overtime focuses on : N ΔK a. The growth rate of the capital stock K AN b. The growth rate of the labor force N c. The growth rate of capital productivity. d. The growth rate of labor productivity. 2. With economic growth accounting, productivity growth (A) in an K economy with a decreasing ratio overtime focuses on:: AK a. The growth rate of the capital stock,- K AN b. The growth rate of the labor force c. The growth rate of capital productivity. d. The growth rate of labor productivity.

Answer 1

CONCEPT

From the production function it is clear that Y grows over time because

• Total factor productivity, A, grows over time (for reasons that are not entirely clear)
• The capital stock, K, grows over time (due to investment)
• The labor supply, N, grows over time (due to population growth, increases in participation rates, immigration)

In what follows let

• %DY = growth in potential output (per year)
• %DK = growth in the capital stock (per year)
• %DN = growth in the labor supply (per year)
• %DA = growth in total factor productivity (per year)

The growth accounting equation is given by

%DY = %DA + aK·%DK + aN·%DN

where

• aK = %DY/%DK = elasticity of output with respect to capital ( holding A and N fixed)
• aN = %DY/%DN = elasticity of output with respect to labor (holding A and K fixed)

Note: 0 < aK < 1 and 0 < aN < 1 due to the production having diminishing returns to both capital and labor.

In the growth accounting equation, the component “K/N” represents the capital to labor ratio. The capital to labor ratio is the ratio of total capital available per one unit of labor. The ratio indicates the extent of capital intensiveness (commonly referred to as capital deepening) of an economy. It shows if the economy is capital-intensive, which basically means the use of more capital and less labor, or labor-intensive, which means the use of more hands-on labor, and less capital. Usually, developed countries, or countries with prosperous economic growth, are more capital-intensive, whereas poor, or developing countries, are generally more labor-intensive.

Therefore

When K/N increase focuses on growth rate of Capital Productivity. Since The Capital's Productivity is more than the Labour Productivity More Capital Intensive Methods are used.

Similarly, When K/N decreses, It focuses on Labour Productivity.

Answers

1 ) c

2 ) d