Question

What happens to aggregate consumption C, employment N, and real wages w when total factor productivity increases?

Answer 1

when total factor productivity increases it means the efficiency of production has been increased.the ability and skills of the economic drivers have also been increased and they are more competent and have better capability concerned with the production.

• IMPACT ON AGGREGATE CONSUMPTION-due to increased productivity the efficiency concerned with the production would enhance therefore better quality product would be available at a lower price and thus people would demand more due to decrease in price and increased quality of the product.the firm would be able to sell the additional production due to decrease in per unit cost of production due to better and innovative technology.

• IMPACT ON EMPLOYMENT-when the demand of the product would increase then there would be need of additional production,and this would require additional requirement of men-power,therefore the demand of skilled labor would be increased and thus the economy can achieve full employment level.

• IMPACT ON REAL WAGES-assuming the wage rate same suppose $50 per day earlier the consumable goods were available at $35 and thus only $15 were left with the person but now the same goods are available for $25 this means that the real wage of the person has been increased by $25.therefore,increased productivity would also leads to increase the real wage in the economy.