Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent, labor growing at 1 percent, and technological progress growing at 2 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:
A)0 percent, 1 percent, and 2 percent, respectively.
B)0.3 percent, 0.7 percent, and 2 percent, respectively.
C)0.9 percent, 0.7 percent, and 1.4 percent, respectively.
D)1.8 percent, 0.3 percent, and 0.9 percent, respectively.

Question

Quizplus · Accepted Answer

The growth-accounting equation is given by: 
Growth of output = growth of capital × capital share + growth of labor × (1-capital share) + growth of productivity
Substituting the given values, we get: 
3% = (0.3 × growth of capital) + (0.7 × 1%) + 2%
Solving for growth of capital, we get: 
growth of capital = (3% - 0.7% - 2%)/0.3 = 0.9%
Therefore, the contributions to growth of capital, labor, and total factor productivity are 0.9 percent, 0.7 percent, and 1.4 percent, respectively.

Assume That an Economy Described by the Solow Model Is