THE ECONOMY: THE CORE PROJECT

UNIT 16. TECHNOLOGICAL PROGRESS, EMPLOYMENT, AND LIVING STANDARDS IN THE LONG RUN

T16.1 Capital and GDP per worker across countries The diagram plots GDP per worker vs. capital per worker, both across countries in 1990 (the scatter plots) and the trajectories since 1760 for a few representative countries (the paths). Based on this information, which of the following statements is correct? Select one answer There is no clear evidence of technological progress in GDP per worker in the US. Taiwan was more capital intensive than the UK in 1990. The average product of capital has been higher in Japan than in the UK over the years shown. Switzerland has been the most successful country in attaining a high GDP per worker by use of its capital. Section 16.1

ANSWER: T16.1 Capital and GDP per worker across countries The diagram plots GDP per worker vs. capital per worker, both across countries in 1990 (the scatter plots) and the trajectories since 1760 for a few representative countries (the paths). Based on this information, which of the following statements is correct? Select one answer There is no clear evidence of technological progress in GDP per worker in the US. Taiwan was more capital intensive than the UK in 1990. The average product of capital has been higher in Japan than in the UK over the years shown. Switzerland has been the most successful country in attaining a high GDP per worker by use of its capital. Feedback The trajectory of GDP per worker in the US does not follow a smooth concave function. Instead, the path can be interpreted as one that follows the curve as it rotates upwards, showing evidence of technological progress. Taiwan used more capital per worker than the UK in 1990. The trajectory for the UK is consistently higher than that for Japan, implying a higher average product of capital throughout the period. By 1990 Switzerland became the most capital intensive country. Yet its GDP per worker was lower than that of the US. Therefore, the US has been more successful in attaining a high GDP per worker by use of its capital. Section 16.1

T16.2 Unemployment benefits and the unemployment rate The figure shows a plot of unemployment rate vs. gross unemployment benefit replacement rate, averaged over the period 2001 to 2011. Based on this information, which of the following statements is correct? Select one answer Eastern Asian countries achieved low unemployment rates despite having high unemployment benefits. Data from Nordic countries suggests that high unemployment benefits lead to high unemployment rates. The graph confirms the prediction of the labour market model that higher unemployment benefits would raise the wage-setting curve, leading to higher unemployment. Countries that offer generous unemployment insurance schemes can still achieve low rates of unemployment. Section 16.9

ANSWER: T16.2 Unemployment benefits and the unemployment rate The figure shows a plot of unemployment rate vs. gross unemployment benefit replacement rate, averaged over the period 2001 to 2011. Based on this information, which of the following statements is correct? Select one answer Eastern Asian countries achieved low unemployment rates despite having high unemployment benefits. Data from Nordic countries suggests that high unemployment benefits lead to high unemployment rates. The graph confirms the prediction of the labour market model that higher unemployment benefits would raise the wage-setting curve, leading to higher unemployment. Countries that offer generous unemployment insurance schemes can still achieve low rates of unemployment. Feedback Japan and Korea achieved low unemployment rates whilst also having low unemployment benefits. For Norway, Denmark, Sweden, and Finland, there is a negative correlation between unemployment benefits and the unemployment rate. The positive correlation between the level of unemployment benefit and the unemployment rate is not evident in the graph. There is a wide range of unemployment levels among countries with high unemployment benefits, for example, the Netherlands vs. France. Section 16.9

T16.3 Deindustrialisation due to slower productivity growth in services The figure is a model that explains how "deindustrialisation" of the workforce may occur due to an increase in the productivity of the goods sector. Before the change, the productivities in both sectors are 1 (i.e. if all labour is employed in one or the other sector then 1 unit of the output is produced). After the change, productivity in the goods sector doubles while productivity in the services sector remains constant. Finally, the population consumes an equal amount of goods and services at all times. Based on this information, which of the following statements is correct? Select one answer After the productivity change, the population consumes 2/3 units each of goods and services. Therefore the proportions employed in both sectors remain the same. The increase in the proportion of the workers in the services sector is caused by a fall in the absolute productivity in the sector. The assumption of faster productivity growth in the goods sector than in the services sector is unlikely in reality. In reality, the lower relative price of goods after the productivity rise is likely to lead to higher goods consumption, an effect which is not considered in the model above. This would somewhat offset the deindustrialisation effects demonstrated. Section 16.11

ANSWER: T16.3 Deindustrialisation due to slower productivity growth in services The figure is a model that explains how "deindustrialisation" of the workforce may occur due to an increase in the productivity of the goods sector. Before the change, the productivities in both sectors are 1 (i.e. if all labour is employed in one or the other sector then 1 unit of the output is produced). After the change, productivity in the goods sector doubles while productivity in the services sector remains constant. Finally, the population consumes an equal amount of goods and services at all times. Based on this information, which of the following statements is correct? Feedback The fact that the economy can now produce 2 units of goods means that to produce 2/3 units it only requires 1/3 of the labour force. The other 2/3 is employed by the services sector to produce its 2/3 units. ‘Deindustrialisation’ is caused by the fall in the relative productivity of the services sector. Here, its absolute productivity is assumed to remain the same. Whilst, for example, the IT revolution has made some areas of services sector much more productive (e.g. music sharing), other areas such as personal care (e.g. haircut) the productivity has remained relatively static. In contrast, continuing innovation has made the goods sector much more productive. Substitution of goods for services would partially offset the decline in goods employment. Select one answer After the productivity change, the population consumes 2/3 units each of goods and services. Therefore the proportions employed in both sectors remain the same. The increase in the proportion of the workers in the services sector is caused by a fall in the absolute productivity in the sector. The assumption of faster productivity growth in the goods sector than in the services sector is unlikely in reality. In reality, the lower relative price of goods after the productivity rise is likely to lead to higher goods consumption, an effect which is not considered in the model above. This would somewhat offset the deindustrialisation effects demonstrated. Section 16.11

T16.4 Deindustrialisation due to slower productivity growth in services Let the productivities in goods and services sectors be given by λg and λs, respectively. The amounts of labour employed are given by Lg and Ls, where Lg + Ls = 1, the total labour force. The total output of each sector is then Qg = λgLg and Qs = λsLs. Now assuming that the demands for goods and services are equal at all times: Qs = Qg  λsLs = λgLg = λg(1-Ls) Solving this for Ls yields the expression for the amount of labour engaged in service production, Ls = λg/(λg+ λs) [Equation (1)] Based on this information, which of the following statements is correct? Select one answer When the sector productivities are the same, both sectors would employ the same amount of labour. When both productivities double, the amount of labour employed in each sector halves. When the services sector is half as productive as the goods sector, then it would employ half as many workers. The final equation (for LS) holds even if we relax the assumption of equal demands for goods and services. Section 16.11

ANSWER: T16.4 Deindustrialisation due to slower productivity growth in services Let the productivities in goods and services sectors be given by λg and λs, respectively. The amounts of labour employed are given by Lg and Ls, where Lg + Ls = 1, the total labour force. The total output of each sector is then Qg = λgLg and Qs = λsLs. Now assuming that the demands for goods and services are equal at all times: Qs = Qg  λsLs = λgLg = λg(1-Ls) Solving this for Ls yields the expression for the amount of labour engaged in service production, Ls = λg/(λg+ λs) [Equation (1)] Based on this information, which of the following statements is correct? Feedback If λg = λs, then by Equation (1), Lg = Ls = 1/2. When both productivities double, the amount of labour in each sector is unchanged. This is because the relative productivities are unchanged. When the services sector is half as productive as the goods sector, then Ls = 1 / (1 + 0.5) = 2/3. This implies that Lg = 1 – Ls = 1/3, i.e. the services sector employs twice as many workers. Equation (1) crucially depends on the assumption of equal demands. For example if Qs = 2Qg, then Ls = 2λg / (λs + 2λg). Select one answer When the sector productivities are the same, both sectors would employ the same amount of labour. When both productivities double, the amount of labour employed in each sector halves. When the services sector is half as productive as the goods sector, then it would employ half as many workers. The final equation (for LS) holds even if we relax the assumption of equal demands for goods and services. Section 16.11