In the country of Aargh, in the equation for TFP,
Y = A×Ka×L1?a,the coefficient is a = 0.2. The capital stock is growing 6 percent per year, employment is growing 1 percent per year, and output is growing 4 percent per year. In the country of Blargh, the coefficient is a = 0.25, the capital stock is growing 10 percent per year, employment is growing 2 percent per year, and output is growing 5 percent per year. In which country is TFP growing the fastest? In which country is output per worker growing the fastest? Explain your answer and show all your calculations.
What will be an ideal response?
TFP growth is based on the equation %?A= %?Y? [a× %?K] ? [(1 ?a) × %?L]. Aargh:%?A= %?Y? [a× %?K] ? [(1 ?a) × %?L] = 4% ? [0.2 × 6%] ? [ 0.8 × 1%] = 2% Blargh:%?A= %?Y? [a× %?K] ? [(1 ?a) × %?L] = 5% ? [0.25 × 10%] ? [0.75 × 2%] = 1%TFP in Aargh is growing faster than in Blargh.Growth in output per worker equals the growth rate of output minus the growth rate of workers.Aargh:4% ? 1% = 3%Blargh:5% ? 2% = 3%Growth in output per worker is the same in both countries.
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