Question

1. Economist Paul Krugman, now of the CUNY Graduate Center and a columnist for the New York Times wrote while at Stanford University that productivity is not everything..."but in the long run it is almost everything." To what was Krugman referring? Why is productivity growth so pivotal to real economic growth and to maintenance of price stability?

2. What are the main component's of the Solow growth model? Why will persistently larger and larger increases in capital investment fail to generate an accelerating rate of real economic growth?

3. Why have emerging market economies grown so much faster than developed market economies over the last three decades?

Answer 1

1. Definition of productivity : Productivity is a measure of the efficiency with which a country combines capital and labour to produce more with the same level of factor inputs. Productivity growth will happen when more output with same input is possible or in less input same output is possible.

Technology improvements, labor skills mainly contribute to productivity growth. Productivity growth shifts production possibility curve to right and in the long run may also shift long run aggregate supply to right making more products at less prices improving standard of living.

In the short run, even with low productivity things can be managed in an economy-It will generate more jobs or influx of labor is possible. However, when productivity grows elsewhere there is tough competition posed to existing firms and they may not be able to withstand to this competition and may go out of business.

This clearly states that in the long run, productivity should go up to stay in competition, grow business or else overall economic growth will be compromised reducing overall economic well being.

All these facts also clarigy role why productivity growth is essential to maintaining growth momentum and stabilize prices which keep firms in businessand continue to create jobs.