Labor, capital and technology

And as you can see, @MattJuniper beat me to it!

You’re very welcome!

Without getting too much into it, as I fear that my subpar teaching skills might confuse you, the basic premise is this:

GDP is a function of labor, capital, and technology.

Technological progress enhances the productivity of both capital and labor.

As is such, technology has a larger impact on potential GDP growth than either labor or capital alone.

@ajost14

@MattJuniper I worked it out too a couple of days back 😛

@diya I think I just worked out what your special Snr PM ability is 😉

@MattyJ It took me awhile to figure out all my special abilities. I have more :p

@diya I think I just worked out what your special Snr PM ability is 😉

This is straight forward to see if you substitute 1% in for each of the three growth variables (technology, labour and capital) whilst holding the other two factors at 0 (and thus seeing the exact amount of effect each has on GDP). The question states that WL = 0.6, and so WC = 1 – 0.6 = 0.4.

So, given the above, the equation gan be rewritten as follows:

Growth in GDP = (growth in technology) + (0.6)(growth in labour) + (0.4)(growth in capital)

Scenario 1: Tech Growth = 1%, Labour Growth = 0%, Capital Growth = 0%
Growth in GDP = (1%) + (0.6)(0%) + (0.4)(0%) = 1%

Scenario 2: Tech Growth = 0%, Labour Growth = 1%, Capital Growth = 0%
Growth in GDP = (0%) + (0.6)(1%) + (0.4)(0%) = 0.6%

Scenario 3: Tech Growth = 0%, Labour Growth = 0%, Capital Growth = 1%
Growth in GDP = (0%) + (0.6)(0%) + (0.4)(1%) = 0.4%

So you can see that a 1% increase in technology has a bigger impact than a 1% increase in either labour or capital, and this is due to the weighting factors for bothe being less than 1.

Hope that makes sense!

If I’m looking at it right, it should simply be due to the fact that the full % of technology growth would contribute to “Growth in potential GDP.”

So for example, if you were to increase each factor by 1%

Technology would contribute 1% to potential GDP
Labor growth would contribute 1% x 60% = 0.60% to potential GDP
Capital growth would contribute 1% x 40% = 0.40% to potential GDP

As you can see, if you were to increase any of these sources of economic growth by 1%, technology will contribute the the most to potential GDP.

@dollarstodonuts but your answer was more efficient 😀

I suppose you could have a hypothetical scenario where WL was 1 and WC was 0 and theme there would be two possible answers…:D