Answer to Question #254067 in Macroeconomics for Flor

Question

In a simple scenario with only two factors of production, suppose that capital share of income is 0.3 and that annual growth rates of capital and labor are 3 and 5 percent, respectively. How much is the labor share?

Answer 1

Output growth rate = growth rate of labor * labor share + growth rate of capital * capital share + growth rate of TFP

Contribution of capital = growth rate of capital * capital share

= 3% * 0.3

= 0.9%

Contribution of labor = growth rate of labor * labor share

= 1% * (1 - capital share)

= 1% * 0.7

= 0.7%