Question

Question#1: Based on the aggregate production function: GDP = F_T (L, K, H)

a. Imagine that the amount of capital K increases by 10% (from 50 to 55 units) while labour and technology stay the same. How much does total GDP and GDP per worker change by? (A specific percentage is not needed, just ‘more than’ / ‘less than’ 10%.)

b. Imagine that capital increases by 5 units again, from 55 to 60. How big is the resulting change in GDP and GDP per worker compared to the change that occurred in part a?

c. What is the term (hint: law) used to describe the relationship between K and GDP in parts a and b?

d. Based on your answers to parts a through c, is it possible to have sustained economic growth due to capital increases alone?

e. Now imagine that the amount of labour L and capital K both increase by 10%. By how much do total GDP and GDP per worker change by?

f. What is the term used to describe this relationship?

g. What is required to have sustained increases in per-worker GDP (which, in turn, results in improving living standards)?

Question#2:

	2013	2017
POPULATION	621,700	624,700
LABOUR FORCE	393,000	383,900
EMPLOYMENT	353,900	352,900
UNEMPLOYMENT	39,100	31,000

a. In 2017, the unemployment rate was 61.45% and 2014 unemployment rate was 63.21%, Did employment go up or down during this period?

b. Based on your answer to question a, can the unemployment rate always provide an accurate sense of how the labour market is performing? Explain.

Answer 1

a. Given the production function an increase in capital lead to a multiple increase in the national income/ GDP, for on the one hand it increases the productivity of other factors of production and on the other it increases the aggregate demand for goods and services.Therefore to an increase in capital the GDP and the labour productivity increases more than 10 %.

b.Business investment through purchase of capital goods drive GDP higher, for it influence both consumption spending and investment spending, but considering the constant increase in a single factor keeping other factors fixed will lead to the operation of diminishing returns,i.e. the return from capital can be lesser if the factor combination has already reached its optimum.

c.The law that establishes the relationship between a single variable factor or variable factors while keeping some factors fixed is the law of diminishing returns.which states that when more and more units of some variable factors is employed with the fixed factors the marginal products becomes lesser and lesser.

d.Sustained economic growth is not possible by changing a single factor variable, due to the operation of negative returns, i.e.for a single factor variable above the optimum limit of the fixed factors the marginal product of the variable factor starts declining,reaches zero and turns negative.