Productivity and growth policies Consider a small island country whose only indu

Question

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.

Based on your calculations, (an increase, a decrease) in physical capital per worker from 2013 to 2014 is associated with (a decrease, an increase) in labor productivity from 2013 to 2014.

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.

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

Offering free public education to every worker in the country

Imposing a tax on printing presses

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) 2013 40 20 1,000 6,000 2014 120 40 1,400 12,600

Explanation / Answer

Physical capital per worker = Physical capital / Labor force

Labor productivity = Output / Labor hours

1) an increase

2) an increase

3) 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.

Year Physical capital Labor force Physical capital per worker Labor hours Ouput Labor productivity 2013 40 20 40/20 = 2 1000 6000 6000/1000 = 6 2014 120 40 120/40 = 3 1400 12600 12600/1400 = 9

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