Question 3 (Production and Growth)

a) Why is productivity related to the standard of living? In the answer be sure to explain what productivity and the standard of living mean. Make a list of things that determine labor productivity.

b) Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from 1960-1991. However, during these same years South Korea had a 6 percent growth rate of average annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different?

c) Consider the production function Y=AF(L,K,H,N). Y represents the quantity of output; L represents the quantity of labor, K represents the quantity of physical capital, H represents the quantity of human capital, N represents the quantity of natural resources.

(i) Suppose F(10, 8, 6, 5) = 100 and F(30, 24, 18, 15) = 300. Does the production function have the property of constant returns to scale? Why or why not?

(ii) Suppose F(12, 10, 9, 7) = 100 and F(24, 20, 18, 14) = 180. Does the production function have the property of constant returns to scale? Why or why not?