Solow Model

CFA Level I Economics
#1

In country X labors relative share of national income is 60%. Which of the following will a 1% increase result in the largest increase in country X’s GDP? A) Labor. B) Technology. C) Capital. I chose A, but the answer for this question is B. This is strange because it seems the explanation in the book FOR A DIFFERENT PROBLEM leads me to a different conclusion. (my appologies, I didn’t make that clear before) "Country ABC’s % share of national income relative to labor is 70, while the share of capital is 30. For country ABC, a 1% increase in the labor force will lead to a much greater increase in economic output than a 1% increase in the capital stock."

It seems like the explanation for the example is contradictory to the explanation for the problem. Can someone clarify? Thanks! smiley

#2

The explanation is incomplete. Also, it says labor is 70%; you’d said 60%. Nevertheless, if labor’s share is, say, 60%, then:

  • A 1% increase in technology (factor productivity) will increase GDP 1%
  • A 1% increase in labor will increase GDP 0.6%
  • A 1% increase in capital will increase GDP 0.4%
#3

Hi. I should have made it clear before that the explanation I quoted was from a different problem (an example, not an actual review problem) That is why I am confused. Sorry about the misunderstanding.

#4

yea, the information was definitely not clear enough.