Question

1) Part A: How do we measure labor productivity? How do changes in labor productivity affect the U.S. standard of living? Does an increase in labor productivity always leads to an increase in standard of living, explain?

Part B:  According to the life-cycle hypothesis, what is the typical pattern of saving and spending for an individual over his or her lifetime? What impact does this pattern have on the saving rate in the overall economy?   

Answer 1

1. Labour productivity of a firm or a country measures the output produced (GDP in case of a country) every hour. It is measured by dividing the total amount of output produced by the total number of working hours.Example: Let firm A produce $50000 worth output in a week where firm A employees work 7 hours a day, from Monday to Friday. Firm B produces $60000 worth output in a week where firm B employees work 10 hour a day, from Monday to Friday.

Firm A’s labour productivity =50000/(7x5) = 1428.57

Firm B’s labour productivity =60000/(10x5) = 1200

Changes in labour productivity generally improves the standard of living as more goods and services are produced at the same time with the same amount of labour when labour productivity is increased. This translates to more goods and services for every person in US. But increase in labour productivity don’t always have a positive effect on the standard of living. When population growth is too high it offsets the increase in labour productivity.

Example: Assume country X’s population is 1000 and labour productivity is $2000 per hour. That translates to a $2 worth of goods and services for every person every hour. Now country X’s population increases to 1500 and it’s labour productivity increases to $2200 per hour, i.e. every person gets $1.46 worth of goods and services per hour.

In the above example if population had remained same every person would’ve received $2.2 worth of goods and services every hour improving the standard of living. But since the population growth has been more rapid than the labour productivity growth it has actually reduced the standard of living.

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