(a) Explain how the following changes will affect the total employment, average wage rate, labor productivity, and growth rate of the GDP of an economy.

(i) An increase in the labor force participation rate

(ii) Growth in capital per worker accompanied by technological change

Which of the above changes would contribute more toward a sustained high economic growth rate of an economy in the long run?

(b) Suggest three government policies that can be used to raise the economic growth rate of an economy.

Expert Solution

a. (i) If labor force participation rate increases it means supply of labor also increases. Total output of the economy is likely to increase due to rise in employment. GDP growth is positively related with labor force participation rate.

If rate of growth in output is greater than rate of growth in labor supply then it indicates improvement in labor productivity. If the participation of skilled workers is greater than unskilled worker in labor force, then growth of output will be higher.

Labor force participation rate in labor intensive sector will increase the wage rate as the demand for labor is greater in this sector.

ii) When growth in capital per worker is accompanied by technological progress increases production and quality of production. Thus, value of production also rises due to higher productivity growth. Consequently, average wage rate, GDP growth and total employment rise as well.

Growth in capital per worker with technological progress will lead to sustainable high growth rate of an economy in the long run, because technological changes shifts the production function and thus production capacity. Therefore, opportunity of employment, wage rate increase and GDP growth are greater than that is only due to change in labor force participation rate.

b) Three government policies are: i) investment in technological progress or R &D, ii) investment in higher education and skill formation iii) accumulation of capital stock (combination of natural, physical and human capital) by reducing pressure on natural resources. Third policy is referred to sustainable growth policy.

Rahul Sunny answered 2 years ago

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