Question #30
Reading: Reading 6 Economic Growth
PDF File: Reading 6 Economic Growth.pdf
Page: 14
Status: Unattempted
Question
Hemali is an emerging market economy where labor's share of GDP is 60%. The long-term trend of labor growth is 2%. Capital investment has been growing at 1.5% and is expected to continue at that rate in the future. Hemali has increased the budgetary allocation for primary and secondary education. Accordingly, economists estimate that labor productivity will increase by 2% per year. The potential GDP growth rate for Hemali is closest to:
Answer Choices:
A. 5.50%
B. 4%
C. 3.80%
Explanation
Using the growth accounting equation:
growth rate in potential GDP = long-term growth rate of labor force + long-term growth
rate in labor productivity = 2% + 2% = 4%