Question

3. Productivity and growth policies

Consider a small island country whose only industry is 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.

Year	Physical Capital	Labor Force	Physical Capital per Worker	Labor Hours	Output	Labor Productivity
	(Looms)	(Workers)	(Looms)	(Hours)	(Garments)	(Garments per hour of labor)
2024	300	100		5,000	45,000
2025	480	120		4,200	50,400

Based on your calculations, (decrease/increase) in physical capital per worker from 2024 to 2025 is associated with (increase/decrease) in labor productivity from 2024 to 2025.

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.

Imposing a tax on looms

Imposing restrictions on foreign ownership of domestic capital

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

Subsidizing research and development into new weaving technologies

Answer 1

Physical capital per worker is givn by Capital/Labor. For 2024 it is 300/100 = 3 workers per looms.  For 2025 it is 480/120 = 4 workers per looms. Hence capital per worker has increased

Labor productivity in 2024 = Output/Labor hours = 45000/5000 = 9 and in 2025 it is 50400/4200 = 12. Hence productivity has incraesed.

Increase in physical capital per worker from 2024 to 2025 is associated with Increase in labor productivity from 2024 to 2025. With more machines productivity is increased.

Select the following to increase productivity of labor

Subsidizing research and development into new weaving technologies. This will increase efficiency of labor.