ELS Chapter 7: Graphing Exercise 2 Answers

ELS Chapter 7: Graphing Exercise 2 Answers
Productivity and Economic Growth
1.	Set average labor productivity to $75,000 and the share of the population employed to 0.70. What is the level of real GDP per person? If average labor productivity rises to $78,750, a 5% increase, what happens to real GDP per person?
	answer: Real GDP per person is $52,500 to begin with. If labor productivity increases by 5%, real GDP per person will rise to $55,125, a 5% increase. Increases in labor productivity directly raise real GDP per person.
2.	Set average labor productivity to $75,000 and the share of the population employed to 0.70. If the share of the population employed rises to 72% (0.72), what happens to real GDP per person?
	answer: Real GDP per person is $52,500 to begin with. If the share of the population employed increases to 72%, real GDP per person will rise to $54,000. Increases in the share of the population employed directly raise real GDP per person.
3.	Explain why, in the long run, changes in average labor productivity are the key factor influencing real GDP per person, or average living standards.
	answer: While changes in average labor productivity and the share of the population employed both directly affect real output per person, or living standards, in the economy, the employment share typically changes slowly and is ultimately limited (it can reach a maximum value of 1.0 or 100%), whereas productivity can continue to grow indefinitely. Thus, in the long run, increases in output per person arise primarily from increases in average labor productivity.
4.	Set average labor productivity to $75,000 and the share of the population employed to 70% (0.70). Over the next 30 years, as baby-boomers begin to retire in increasing numbers, the share of the population employed is likely to decrease. Let N/POP fall to .60. What happens to real output per person? What needs to happen to Y/N to keep real output per person constant or growing?
	answer: Real GDP per person is $52,500 to begin with. If the share of the population employed falls to 60% (0.60), real GDP per person will fall to $45,000. To maintain the level of real GDP per person at $52,500, average labor productivity would need to rise to $87,500, an increase of more than 16%. To keep real GDP per person growing, the increase in average labor productivity would need to be even higher.
5.	What factors are most important in raising average labor productivity?
	answer: As the previous problems illustrate, growing average labor productivity is the key to a growing economy and increasing living standards. Increases in human capital (e.g. education), physical capital, technology, the effectiveness of management and entrepreneurship, and the free functioning of the social and legal environment are the most important factors in raising average labor productivity, according to economic theory. Government policies that increase these factors will encourage higher labor productivity, and hence, higher living standards.