- a) If real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? (b) How many years would it take for GDP (gross domestic product) to double (using your answer from part a)?
Grow rate= (present-past)/past
- b) Using the rule of 72, years to double=72/interest rate
- 2. Sources of human capital
Human capital is the collective skills or intangible assets of individuals that can be used to create economic value for the individuals, employers, and the community. The main source of human capital is the investment in education. This explains why parents spend much in education (Ehrlich and Kim, 2015). What the money spends in school is the same as to the money spent by companies on capital to increase profits in future. Education is also given to increase profit in future.
Health is also an important input for the future development of a country and an individual. Normally a person in good health can work much better than the unhealthy one. Hence money spent on health services to ensure the well-being of an individual in a community is very crucial to attaining growth. Medical help in the course of an illness such as the cost of preventive medicine or vaccinations, therapeutic drugs, social medicine-spreading knowledge about health and achieving health literacy, provision of safe water are some of the expenses connected to health (Ehrlich and Kim, 2015). This expenditure is directly responsible for increasing the number of healthy workforces and hence the important source of capital.
On the job training is also a cost that a firm incurs to improve the knowledge and skills of an individual. This cost is incurred in the following forms such as off campus training, sending the employees out to take training related to the job or the workers being trained with the firm by a well trained and experienced operator. This increases the company’s productivity and efficiency which are the benefits that a business enjoys after spending on the training. This expenditure on the job training is a source of human capital formation as the company s gets much more skilled and efficient laborers who increase the productivity of the firm in the long run and hence maximizes its profits.
People move from rural to urban areas in search of work or need to increase income. As people migrate, there is the expenditure that is incurred such as the cost of transport, increase cost of living in urban areas and psychic costs of living in a different social-cultural society. This qualifies the expenditure on migration a source of formation of human capital.
Sources of labor productivity
This is a measure of economic growth within a country. Its measures the amount of good and services produced by an hour of labor. Labor productivity is concerned with the volume of output obtained by each employee (Ehrlich and Kim, 2015). Labor productivity depends on investments and saving in physical capital, new technology, and human capital. Physical capital is an amount of money that people have in savings and investments (Eldridge and Price, 2016). New technologies are technical advancements such as robots, and human capital is the increase in education and specialization of the workforce. There are several factors which increase technical efficiency. Specialization or learning new techniques can enhance productivity. A laborer can raise productivity by receiving better and quality education and training. Improving capital equipment is the incredible determinant of productivity. It’s easier to dig a ditch using a hydraulic-powered tractor than with a small shovel (Eldridge and Price, 2016). However, no equipment can be improved without delaying present consumption as capital tools do not directly produce revenue or consumed immediately.
Law of diminishing return
This law states that if one input in the production of a commodity is increased while the other factors remained constant, a point will be reached in which it yield will lower incremental per unit. This law does not apply that adding more of factors will decrease the total production (negative return) although this is common (Eldridge and Price, 2016). An example is increasing people to a job or assembling a car on a factory floor. It reaches a point in which increasing workers cause’s predicaments such as employees interfering with each other’s activity or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less useful. This law is a fundamental principle of economics which play a vital role in production theory
What happens when the government raises taxes and uses revenues to engage in spending?
Tax increases and spending cuts hurt the economy in the short run by reducing demand through decreasing disposable income and discouraging businesses from investing (Engdahl, 2011). Raise taxes, and citizens would have less money to spend. Cut spending, and less government money would be pumped into the economy. Professional forecasters estimate that a tax increase equal to 1 percent of the nation’s economic output usually reduces gross domestic product by about 2 percent after 16 months. A spending cut of that size, by contrast, reduces G.D.P. by about 1.6 percent or more. Government spending on things like education, scientific research, and infrastructure help increase future productivity. This type of the expenses usually produces high social returns however the private sector may not step up if the government pulls back.
It will results to productivity declines as the tax rate increases as many people will work less. It discourages entrepreneurship, work, and savings (Engdahl, 2011). They can encourage taxpayers to reorganize their tax affairs to receive more of their compensation in less heavily taxed forms. When the tax rate increases, many people will try to avoid as much as they can to evade paying taxes and spend less time on the more productive activity. Government revenue does not increase due to increase in tax rate. Increasing tax results to poor standard of living and create high unemployment rate and budget deficits. People will suffer as they will not be able to afford quality products and services.
The price of goods and services will increase thus reducing consumer spending. This will cause the demand of the products to reduce and make consumers opt for substitutes that are available for cheaper prices. Consumer spending will also reduce especially among the poor people which is proven through consumer sentiment (Engdahl, 2011). This will cause fluctuations in the economy because of the altitudes of the clients or the state of economy. Many firms will go bankrupt because they can’t operates after government takes its cut. Other businesses will flee to other countries to escape the high tax. This will make many people lost their jobs.
Ehrlich, I. and Kim, J. (2015). Immigration, Human Capital Formation, and Endogenous Economic Growth. Journal of Human Capital, 9(4), pp.518-563.
Eldridge, L. and Price, J. (2016). Measuring quarterly labor productivity by industry. Monthly Labor Review.
Engdahl, S. (2011). Taxation. Farmington Hills, MI: Greenhaven Press.