Consider a small island country whose only industry is weaving. The following table shows information about the small economy in two different years. Complete the table by calculating physical capital per worker as well as labor productivity. Physical Capital Labor Force Physical Capital per Worker Labor Hours Output Labor Productivity
Year
2029 300 100 4,000 36,000
2030 480 120 4,200 50,400

Based on your calculations, in physical capital per worker from 2029 to 2030 is associated with in labor productivity from 2029 to 2030. Suppose you're in charge of establishing economic policy for this small island country. Which of the following policies would lead to greater productivity in the fishing industry?

a. Imposing a tax on looms
b. Imposing restrictions on foreign ownership of domestic capital
c. Sharply increasing the interest rate on student loans to people pursuing advanced degrees in weaving
d. Subsidizing research and development into new weaving technologies

Small Island Country

1. Completion of Table and Calculation of Physical Capital Per Worker and Labor Productivity:

         Physical  Labor  Physical Capital  Labor   Output        Labor

         Capital   Force     per Worker       Hours                 Productivity

Year

2029   300       100       3 (300/100)      4,000   36,000    9 (36,000/4,000)

2030   480       120       4 (480/120)      4,200   50,400   12 (50,400/4,200)

2. Based on the calculations, physical capital per worker from 2029 to 2030 is NOT associated with labor productivity from 2029 to 2030.

3. The policy that would lead to greater productivity in the fishing industry is:

d. Subsidizing research and development into new weaving technologies

Explanation:

a) Data and Calculations:

         Physical  Labor   Physical Capital    Labor   Output      Labor

         Capital   Force       per Worker       Hours                  Productivity

Year

2029   300      100                                   4,000   36,000

2030   480      120                                   4,200   50,400

         Physical  Labor  Physical Capital   Labor  Output        Labor

         Capital   Force     per Worker       Hours                 Productivity

Year

2029   300       100       3 (300/100)      4,000   36,000    9 (36,000/4,000)

2030   480       120       4 (480/120)      4,200   50,400   12 (50,400/4,200)

b) The last question mixes garment (weaving) industry and fishing industry.  The answerer is left conflicted.

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