Question

Suppose, from 2018 to 2019, a country’s output rose from 20,000 to 30,000 units, its capital...

Suppose, from 2018 to 2019, a country’s output rose from 20,000 to 30,000 units, its capital stock rose from 5,000 to 7,000, and its labor force declined from 8,000 to 6,000. Suppose the elasticity of output with respect to capital and labor are equal to 0.4 and 0.6, respectively. Answer the following questions based on the above information:

  1. How much did capital contribute to economic growth over the year?

  2. How much did labor contribute to economic growth over the year?

  3. How much did productivity contribute to economic growth over the year?

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Answer #1

Change in capital stock in % terms is -

= (7000 -5000)/5000 × 100

= 2000/5000 ×100 = 40%

Similarly change in labour force in % terms -

= 8000 -6000 /8000 ×100 = 25%

Further elasticity of output w.r.t capital means if there is 1% change in capital, output increases by 0.4%.

Therefore according to the problem,

》 change in output due to 40% change in capital stock = 800

Similarly for labour we have,

》 change in output due to 25% change in labour = 750

Remaining change in capital = 2000 - (750+800) = 450 is brought about by productivity change.

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