Questions:

Read Chapter 3 of the Economic Report of the President, 1995.

Solutions:

1. This article suggests that the growth rate of GDP can be increased by:
   • improving the quality of the labor force through education and training;
   • increasing the size of the private capital stock;
   • increased public investment in infrastructure (roads, bridges, airports, etc.); and
   • increased research and development.
2. The major problems associated with measuring productivity include:
   • difficulty in measuring output in the service sector (see below);
   • errors in measuring changes in the price level; and
   • errors in measuring hours worked.
   In addition, it has recently been argued that expenditures on business software should be included in GDP as a form of investment (since the benefits of the software often last for several years).
3. The major difficulty associated with measuring productivity in the service sector is the difficulty in defining and measuring output in this sector. For example, a day's stay in the hospital today is a very different commodity than a day's stay 40 years ago as a result of advances in medical treatment. It's relatively easy to count the number of specific goods produced (although quality change also results in problems here as well), but it is more difficult to measure the productivity of a physician, lawyer, or police officer.