Question

a) What factors determine productivity? How are these factors combined to produce output? b) How does human capital differ from technological knowledge? Suggest policy measures to improve both factors. c) Surveys find that business confidence decreased in a country. What will be its effect on the real interest rate? Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment.

Answer 1

a)

Productivity refers to the effectiveness of production and is measured by means of output per unit of input.

The productivity is affected by following factors.

1. Physical capital: It refers to the stock of physical equipment and structures such as buildings & machines that are used to produce goods and services.
2. Human capital: Human capital consist of labors & workers who have knowledge and skills acquired through education, training, and experience.
3. Natural resources: These are inputs used in the production of goods and services that are provided by nature such as land.
4. Technological knowledge: The knowledge & understanding of ways to produce goods & services in an efficient manner plays an important role in productivity.

Productivity is the result of co-operation of factors of production discussed above. They can be combined in mathematical or graphical way in a production function which relates physical output of a production process to physical inputs or factors of production.

b)

Human capital refers to the stock of skills, knowledge, competencies, personality attributes & creativity which is present in a workforce or labor who gain it through education, training, and experience to produce economic value. It can be quantified. It is the risk-adjusted net present value of the total economic production of a person.

Whereas technological knowledge refers to the understanding of the best ways to produce goods and services. Technological Knowledge focuses on effectiveness & many times it refers to things that do not exist yet, but are still to be designed or made.

Though both are closely related to each other, there is an important difference. Human capital refers to the resources used in transmitting this understanding to the labor force.

The government can improve human capital & technological development through educational policies, worker training and health programs. Government should invest in skills training & learning.