Question

Investment (more tools) and technological improvement (better tools) each contribute to economic growth by making labor more productive. What percentage of the U.S. economy is allocated to investment in a normal year? Also, describe how fast the U.S. economy grows in real terms on a per capita basis in an average year? (10 points)8. 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)9. Identify a change in fiscal policy that will shift the composition of output toward investment. Present a composition of output analysis to explain why the policy you suggest will tend to shift the composition of output toward investment

Answer 1

Economic data from US government sites show that in a normal year, investments as a part of GDP in the US is approximately 17%.

GDP per capita in the US in 2017 was $59,484 and in 2016 was $57,542. On calculating the rise in GDP per capita, we find the annual rate of growth in GDP per capita in the US is around 3.5%.

An increase in labor productivity either because of more investments or better technology increases per unit production capacity of an individual unit of labor which in turn leads to overall increase in total production of goods and services in the economy, consequently higher GDP growth and wages or salaries for the wokers or employees.

Continuous increase in labor productivity in the US has led to constant rise in wage rates for the workers providing more welfare and better standard of living than before.

More saving leads to higher investements in the economy which in turn increases labor productivity and consequently higher GDP growth. Thus the government should incentivise and encourage more and more saving.

A fiscal policy that incentivises higher efficiency and productivity by lowering down tax burden for more productive firms may encourage firms to invest more leading to better productivity and efficiency in production.