Consider the economies of Hermes and Gobbledigook, both of which produce gaggles
ID: 2495860 • Letter: C
Question
Consider the economies of Hermes and Gobbledigook, both of which produce gaggles of gop using only tools and workers. Suppose that, during the course of 50 years, the level of physical capital per worker rises by 4 tools per worker in each economy, but the size of each labor force remains the same. Complete the following tables by entering productivity (in terms of output per worker) for each economy in 2016 and 2066. Initially, the number of tools per worker was higher in Hermes than in Gobbledigook. From 2016 to 2066, capital per worker rises by 4 units in each country. The 4-unit change in capital per worker causes productivity in Hermes to rise by a amount than productivity in Gobbledigook. This illustrates the concept of, which makes it for countries with low output to catch up to those with higher output.Explanation / Answer
Hermes:
2016 Productivity: Output per worker= Total output / labour force = 3000/30 = 100
2066 Productivity: Output per worker= Total output / labour force = 3600/30 = 120
Gobbledigook:
2016 Productivity: Output per worker= Total output / labour force = 2400/30 = 80
2066 Productivity: Output per worker= Total output / labour force = 3600/30 = 120
Hermes
Gobbledigook
Rise in productivity in Hermes = 120- 100 = 20
Rise in productivity in Gobbledigook = 120 - 80 = 40
Concept of Increasing Returns to scale : With the same level of input, the rise in output is more.
The 4-unit cahnge in capital per worker causes productivity in Hermes to rise by a smaller amount than productivity in Gobbledigook. This illustrates the concept of Increasing Returns to Scale or higher efficiency , whcih makes it efficient / better for countries with low output to catch upto those with higher output.
Year Physical Capital Labor Force Output Productivity 2016 11 30 3000 100 2066 15 30 3600 120