3. Productivity and growth policies Consider a small island country whose only i

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. Labor Force (Workers,) 60 100 Physical Capital per Worker (Looms) Labor Hours Labor Productivity Physical Capital (Looms) 120 400 Output Hours)(Garments) (Garments per h hour of labor) Year 2025 2026 3,300 3,500 23,100 49,000 Based on your calculations, productivity from 2025 to 2026 in physical capital per worker from 2025 to 2026 is associated with in labor 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. Encouraging saving by allowing workers to set aside a portion of their earnings in tax-free retirement accounts Subsidizing research and development into new weaving technologies Sharply increasing the interest rate on student loans to people pursuing advanced degrees in weaving Offering free public education to every worker in the country

Explanation / Answer

Physical capital per worker-Physical capital/labour force

In 2025

Physical capital per worker=120/60=2

In 2026

Physical capital per worker=400/100=4

Labour productivity=output/labour hours

In 2025

Labour productivity=23,100/3,300=7

In 2026

Labour productivity=49,000/3,500=14

Increase in labour productivity will result from

1.Subsidizing R and D in weaving industry.

This will improve technology and better technology leads to higher labour productivity.

2.Offering free public education to every worker in the country.

Investing in education leads to formulation of human capital.Some of this human capital would be absorbed in the weaving industry increasing productivity.

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