Econ 471 Homework 4 With Answers

Problem Set #4 – Answer Key 1. The following table provides data on output per worker, physical capital per worker, and human capital per worker, all relative to the U.S. Suppose the production function is. A) For each country, calculate factor accumulation and productivity relative to the U.S. y k h A = Country Output per Worker Physical Capital per Worker Human Capital per Worker Factor Accumulation Productivity Canada 0.76 1.21 0.81 (1.21)1/2(0.81)1/2 = 0.99 0.76/0.99 = 0.77 Mexico 0.24 0.64 0.25 (0.64)1/2(0.25)1/2 = 0.4 0.24/0.4 = 0.6 B) In which country does productivity play the larger role in explaining income relative to the U.S.? Explain. This question is asking for a comparison of the role of productivity across (rather than within) countries. So what you want to do is compare the figures in the last column of the table above and the country with the figure that is farthest away from one will be the one whose productivity plays a larger role. Mexico. Mexico has the biggest disadvantage in terms of productivity since its figure for productivity (0.6) is farther away from 1 compared to Canada. Thus, the country in which productivity plays the larger role in explaining income relative to the U.S is Mexico. 2. Suppose that we are comparing two countries, Mexico and Canada where the actual GDP per capita in 2012 were $5,000 and $50,000 respectively. Assuming that both countries have the same production function, the same values of (at 5%) and that the value of is 1/2. The following table shows data on rates of savi