Suppose that two nations start out in 2013 with identical levels of output per w

Question

Suppose that two nations start out in 2013 with identical levels of output per work hour-say, $100 per hour. In the first nation, labor productivity grows by 1 percent per year. In the second, it grows by 2 percent per year. Use a calculator or a spreadsheet to determine how much output per hour each nation will be producing 20 years later, assuming that labor productivity growth rates do not change. Then, determine how much each will be producing per hour 100 years later. What do your results tell you about the effects of small differences in productivity growth rates?

Explanation / Answer

(1) Output per hour after 20 years

Nation 1: $100 x (1.01)20 = $100 x 1.22 = $122

Nation 2: $100 x (1.02)20 = $100 x 1.49 = $149

(2) Output per hour after 100 years

Nation 1: $100 x (1.01)100 = $100 x 2.70 = $270

Nation 2: $100 x (1.02)100 = $100 x 7.24 = $724

As we see, even a small difference in productivity (of 1%) results in higher and higher output with increasing time.

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