Answer to Question #112996 in Macroeconomics for zach

Question

An economy initially has 200 units of physical capital per worker. Each year, it increases the amount of physical capital per worker by 10%. According to the aggregate production function for this economy, each 1% increase in physical capital per worker, holding human capital and technology constant, increases real output per worker by 0.25%.

a. If real output per worker is initially $1,000, what will it equal as a result of only the increase in physical capital per worker (i) after one year? (ii) after two years?

b. If after two years real output per worker is actually $1,100, how much of its growth was due to increase in human capital and technological progress?

Answer 1

a) 1,000*200*0.1*0.25/100=$50 - output growth per worker after 1 year, so output will be $1,050

1,050*220*0.1*0.25/100=$57.75 -output growth per worker after 2 years, so output will be $1,050+$57.75=$1,107.75

b) Even without increase in human capital and technological progress output will be $1,107.75. If it is actually $1,100, so impact of human capital and technological progress is negative (-$7.75). It can happen if the quantity of workers decreased.