Check Your Understanding

1. Question

   Describe the shift in, or movement along, the productivity curve caused by each of the following:

   1. The amounts of physical and human capital per worker are unchanged, but there is significant technological progress.

      Significant technological progress will allow an increase in productivity (real GDP per worker) at any given level of physical capital per worker. The result is an upward shift of the productivity curve.

   2. The amount of physical capital per worker grows, but the level of human capital per worker and technology are unchanged.

      An increase in the amount of physical capital per worker causes a movement upward and to the right along the productivity curve. Due to diminishing marginal returns, each successive increase in physical capital per worker results in a smaller increase in productivity than the one before it.

2. Question

   The real GDP of Erehwon has grown 5% per year over the past 30 years. The amount of physical capital has grown 4% per year. The size of the labor force hasn’t changed. Estimates by economists say that each 1% increase in the amount of physical capital per worker, other things equal, raises productivity by 0.3%.

   1. How much has growing physical capital per worker contributed to productivity growth? What percentage of total productivity growth is that?

      The amount of physical capital has increased by 4% per year and the size of the labor force hasn’t changed, so the amount of physical capital per worker has increased by 4% per year. Given that each 1% increase in physical capital per worker raises productivity by 0.3%, the productivity growth attributable to growth in physical capital per worker is 4% × 0.3 = 1.2% per year. Output has increased by 5% per year and the number of workers hasn’t changed, so productivity (output per worker) has increased by 5% per year. The growth in physical capital per worker contributed 1.2%/5% × 100% = 24% of this productivity growth.

   2. How would your answer to part a change if the labor force had grown by 4% per year?

      If the labor force had grown by 4% per year, the 4% increase in physical capital per year would have been just enough to keep the physical capital per worker unchanged. Thus, none of the increase in productivity would have been attributable to growth in physical capital per worker.

3. Question

   Multinomics, Inc., is a large company with many offices around the country. It has just adopted a new computer system that will affect virtually every function performed within the company. Why might a period of time pass before employees’ productivity is improved by the new computer system? Why might there be a temporary decrease in employees’ productivity?

   It will take time for workers to learn how to use the new computer system and to adjust their routines. And because there are often setbacks in learning a new system, such as accidentally erasing your computer files, productivity at Multinomics may decrease for a period of time.