Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent, and labor growing at 1 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:-
A) 0.3 percent, 0.7 percent, and 2 percent, respectively.
B) 0.9 percent, 0.7 percent, and 1.4 percent, respectively.
C) 0 percent, 1 percent, and 2 percent, respectively.
D) 1.8 percent, 0.3 percent, and 0.9 percent, respectively.

The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are 0.9%, 0.7%, and 1.4%, respectively.

Explanation:

Given

Capital growing = 3%

Labor growing = 1%.

Capital share = 0.3

Assuming the economy is in a steady state;

The growth accounting equation is as follows:

GDP Growth = Capital Growth*(Weight of Capital Contribution) + Labor Growth*(Weight of Labor Contribution) + Technological Progress.

Contribution to Growth of Capital = 3% * 0.3 = 0.9%

Contribution to Growth of Labour = (1 - 0.3)% = 0.7%

Total Factor Productivity = 1 + 0.3 + 0.1 = 1.4%

B. 0.9 percent, 0.7 percent, and 1.4 percent, respectively

Explanation:

The growth accounting equation measures how changes in the Gross Domestic Product (GDP) are influenced by productivity levels due to changes in available capital, labor, and technology.

Output and capital growth = 3%

Labor growth = 1%

Capital share = 0.3

Contribution to capital = capital growth × capital share = 3% × 0.3 = 0.9

Contribution to labor = 1% - 0.3= 0.7

Contribution to total factor of productivity = 1 + 0.3 + 0.1 = 1.4

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