In Techland, from 1980 to 2010, holding technology and human capital fixed, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that real GDP per worker actually increased from $40,000 to $320,000.

What share of the annual growth rate of real GDP per capita was attributable to increasing physical capital per worker?

If only physical capital per worker had increased, the real GDP per worker of Techland would have increased by 100% in thirty years (from $40,000 to $80,000). But since technological progresses were also made, the real GDP per worker increased 700% (from $40,000 to $320,000). Out of the total increase in real GDP per worker ($280,000);

$40,000 can be attributed to increase in physical capital per worker (one seventh of the total increase)
$240,000 can be attributed to technological progress (six sevenths of the total increase)

SachinM SachinM · Answer 2 · 2023-10-07T10:55:00-04:00

Increasing physical capital per worker can significantly impact real GDP per worker, especially when combined with technological progress.

Increasing physical capital per worker can lead to a rise in real GDP per worker. In this case, the increase in physical capital contributed to an increase in real GDP per worker from $40,000 to $80,000 initially. However, with technological progress, real GDP per worker actually rose to $320,000. To calculate the share of growth attributable to physical capital, you need to compare the growth with and without the increase in physical capital per worker.