Question

1. Present an analysis that shows how an increase in labor productivity (perhaps from more investment or perhaps from improved technology) will tend to impact the economy. Identify which of your results fit what we actually observe for the U.S. economy over time. Complete your answer to this question by identifying one economic policy you think will help enhance labor productivity. (15 points)

Answer 1

Any economy, across the globe has limited resources through which, it can produce goods and supply in the markets. Over a period of time, as the population size increases, the demand for goods and services also see an increasing trend.

The result is that new industries come up, which try and supply to the missing demand. But once, the maximum is attained, then we are unable to provide goods and services any further as a producer. The increase in demand any further causes inflation in the economy as the aggregate demand which is the total demand in any economy remains higher than the total supply.

The only way to overcome this situation, which the United States and most other countries have implemented successfully is to increase the level of technology being used and the overall labour productivity so as to increase the total supply in the country.

Labour productivity is measured in terms of the increase in output per unit labour deployed over time. An increase takes place, if the existing labour force, finds new means that increase the supply while keeping costs equal.

Technological development impacts the economy in a great manner. With the current resources also, the economy is able to supply more goods to the society. Once the domestic demand has been met, it can export these goods to other countries and gain from the transactions and minimize fiscal deficit if any.

When we look at the United States, technological expansion is the core reason for it having higher capital and being more productive. In most industries across the globe, the United States is seen to be the world leader. This gives it an edge in production and selling and the core reason why dollar is used as a free trade instrument is the fact that the country has remained so productive.

One way of increasing labour productivity is to increase gradually the investment towards education. In countries such as India and China, the growth rates have been higher primarily because of this investment which has made their labour force more productive and has been able to produce more goods and services accordingly.

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