In this exercise students will solve three problems involving economic growth rates. By using the formula in Section 3.a., students should have little difficulty in calculating economic growth. More important is the fact that they understand that economic growth is the sum of the growth rate of total factor productivity and the growth rate of resources (both labor and capital). Point out that these exercises show that even if labor and capital stock are constant, technological innovation would generate economic growth through changes in TFP.

Divide the class into groups of three or four students. Each group must solve the following problems and have a spokesperson prepared to explain the solution to the rest of the class. A different group will be called upon to explain the answer to each question.

What is the growth rate for an economy where there is no growth of resources but TFP grows at a rate of 1 percent per year?

Answer: 1%

What is the growth rate for an economy where TFP is constant, labor grows at a rate of 1 percent per year, capital grows at a rate of 2 percent per year, and labor's share of output equals 60 percent, while capital's share equals 40 percent?

Answer: 1.4%

What is the growth rate for an economy where TFP grows at a rate of 3 percent per year, the size of the labor force is unchanged, the capital stock grows at a rate of 2 percent per year, and labor and capital each account for 50 percent of output?

Answer: 4%