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Suppose labour force in Country A increases from 100 in 2017 to 200 in 2018. Explain...

Suppose labour force in Country A increases from 100 in 2017 to 200 in 2018. Explain the effect of this increase on real GDP, real GDP per capita and average labour productivity.

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Answer #1

Consider given problem here the labor demand is given by “W=MPL”. Now, following fig shows the labor market.

So, initial equilibrium is “E1” the intersection of “LS1” and “DL”, => the level of employment is “L1=100”. Now, as the labor force increases from “LS1” to “LS2”, => the new equilibrium is given by “E2”, => the employment increases to “L2=200”. So, here the real wage decreases to “W2” from “W1”.

So, as the real wage decreases implied the “MPL” increases, => real GDP of a nation will increase. Now, “MPL” is the additional output by hiring additional labor, => as the MPL increase, => additional labor increase output more than 1 unit, => the per capita real GDP will increase and the “average productivity will also increase”.

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