Question 4 Chapter 12 Productivity and growth policies
4. Productivity and growth policies
Consider a small island country whose only industry is
... [Show More] weaving. The following table shows information about
the small economy in two different years.
Complete the table by calculating physical capital per worker as well as labor productivity.
Hint: Recall that productivity is defined as the amount of goods and services a worker can produce per hour.
In this problem, measure productivity as the quantity of goods per hour of labor.
Physical Capital Labor Labor
Explanation: Close Explanation
Physical capital per worker is equal to the ratio of physical capital to labor:
An economy’s labor productivity is equal to the ratio of output to labor hours devoted to the
production of the output:
Year
Physical
Capital
(Looms)
Labor
Force
(Workers)
per Worker Hours Output Productivity
(Looms) (Hours) (Garments) (Garments per
hour of labor)
2027 160 40 4 2,000 20,000 10
2028 180 60 3 3,900 29,250 7.5
Points: 1 / 1
a decrease
a decrease
Explanation: Close Explanation
The changes in the small economy's physical capital per worker and labor productivity from one year to
the next illustrate the general principle that a higher level of capital per worker leads to higher labor
productivity. When each worker has more equipment and tools to work with, each worker will
generate more output per hour of labor. On the other hand, if each worker has a smaller amount of
equipment and tools to work with, each worker will generate a smaller amount of output per hour of
labor.
Based on your calculations, in physical capital per worker from 2027 to 2028 is associated
with in labor productivity from 2027 to 2028.
Points: 1 / 1
Suppose you're in charge of establishing economic policy for this small island country.
Which of the following policies would lead to greater productivity in the weaving industry? Check all that
apply.
Encouraging saving by allowing workers to set aside a portion of their earnings in tax-free
retirement accounts
Imposing a tax on looms
Subsidizing research and development into new weaving technologies
Sharply increasing the interest rate on student loans to people pursuing advanced degrees in
weaving
Points: 1 / 1
Explanation: Close Explanation
Productivity, or output per unit of labor input, is determined by four primary factors:
1. Human capital per worker
2. Natural resources per worker
3. Physical capital per worker
4. Technological knowledge
Improving the health and education of the workforce will improve human capital per worker; reducing
access to education by raising the interest rates on student loans will not. Promoting research and
development will help to expand technological knowledge. Encouraging saving will expand the pool of
savings available for investment in physical capital. Taxing the acquisition of capital and restricting
foreign direct investment will reduce the amount of physical capital per worker. [Show Less]