Question

Based on the article, "The Productivity Puzzle," the document discuss the following: How do physical capital, human capital, and technological change contribute to the productivity slowdown? How could the government play a role? What are the potential risks of using government policy to try and increase productivity? How does this impact GDP? (Think beyond the scope of the article and keep it to economical thought.)

Answer 1

(PART-1)

Productivity makes an economy capable of producing output with more efficiency. It is given by the ratio of actual output ( Production ) to the inputs required.

Lets understand how the combination of Physical capital, Human capital and the Technological change affects the productivity.

#Physical Capital:-

Economist point out that there is a low investment in the capital stock which is the total available physical capital in a nation( Physical capital are goods that are produced and are used to produce other goods). Now a countries's capital stock can be increased through investment but the data says that currently the capital stock is growing slowly due to low investment. This simply indicates that the increase in capital per worker has been smaller. This is how physical capital contributes in the productivity slowdown process.

# Human capital

Now we know that the investment on human capital has a direct relationship with productivity. As the level of knowledge and skills acquired rises among the people this simply results in higher productivity. But most recently it has been seen that the educational attainment has slowed which is thus contributing in a slower pace of productivity growth .

# Technological change

It has been also seen that some technology changes and advancement have also contributed to the slow productivity growth in the economy. Advances in technology also add to the slowdown of the productivity though to a very small extent.

Let's take the example of twitter and snapchat. Though these apps have greater social value, but they might even reduce the labor productivity. This is because people gives huge time on usage of these apps which leads to distraction from their jobs and works. So a technology change also affects the pace of the productivity growth.

(PART-2)

According to economist goverment can play a crucial role in enhancing the productivity growth.

# Goverment must decide to plan on infrastructure including airports, highways and bridges. This will help in increasing productivity because it simply reduces cost of transporting goods and people from one place to another. By " Cost " it means time and money.

# Goverment can also increase productivity by increasing its expenditure on education. It could be termed as an investment in Human capital which will directly affect the productivity growth.

# Also the goverment can apply tax reforms that creates incentive for capital investment by private firms.

# More effective goverment's regulations can also help in increasing productivity.

(PART-3)

There are some potential risks of implementing goverment policies for increasing productivity which are as follows:-

# Spending more on research and development can promote technological change which may hinder the pace of productivity.

# Also as goverment interventions can be costly, paying for these policies will result in higher taxes, larger budget deficit and the loss of service currently enjoyed.

(PART-4)

Now due to high taxes and increased budget deficit, the country may experience a moderate GDP growth or a fall in the GDP.