Question

3. Productivity and growth policies

Consider a small island country whose only industry is printing. 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.

Year	Physical Capital	Labor Force	Physical Capital per Worker	Labor Hours	Output	Labor Productivity
	(Printing presses)	(Workers)	(Printing presses)	(Hours)	(Books)	(Books per hour of labor)
2026	120	60		3,000	21,000
2027	400	100		3,500	49,000

Based on your calculations, in physical capital per worker from 2026 to 2027 is associated with in labor productivity from 2026 to 2027.

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 printing industry? Check all that apply.

Subsidizing research and development into new printing technologies

Offering free public education to every worker in the country

Encouraging saving by allowing workers to set aside a portion of their earnings in tax-free retirement accounts

Sharply increasing the interest rate on student loans to people pursuing advanced degrees in printing

Answer 1

Year	Physical Capital	Labor Force	Physical Capital per Worker	Labor Hours	Output	Labor Productivity
	(Printing presses)	(Workers)	(Printing presses)	(Hours)	(Books)	(Books per hour of labor)
2026	120	60	120/60=2	3,000	21,000	21000/3000=7
2027	400	100	400/100=4	3500	49000	49,000/3500=14

Based on your calculations, an increase in physical capital per worker from 2026 to 2027 is associated with an increase in labor productivity from 2026 to 2027.

Which of the following policies would lead to greater productivity in the printing industry?

Offering free public education to every worker in the country

Encouraging saving by allowing workers to set aside a portion of their earnings in tax-free retirement accounts

Subsidizing research and development into new printing technologies