Econ 233, Answers to problem set 1

1. Labor productivity is the number of units of output per worker. It is not necessarily a good indicator of overall efficiency of production. It does not take into account the amount of other inputs that are used in the production process. In particular, it does not take into account capital stock. Consider the following example: there is a machine that halves the time required to produce shoes. Suppose that factory A uses the machine while factory B does not. Both factories employ 10 workers. Factory A makes 1000 pairs of shoes a year and factory B makes 800 pairs a year. Factory A has higher labor productivity -100 pairs per worker- while factory B makes only 80 pairs per worker. However, since factory A uses a machine that supposedly cuts the production time in half, their productivity should be twice as much. In this example, workers in factory A are likely to be poorly organized and inefficient in their production. A measure of  overall efficiency of production is total factor productivity (TFP). TFP takes into account all inputs and measures changes in output that can not be accounted for by changes in inputs.
2. No, it does not make sense to compare the labor productivity between the U.S. and U.S.S.R using our data. Labor productivity is the number of units of output per unit of labor input. In order to compare labor productivity across countries, both the measure of output and the measure of labor input have to be comparable. In our case output in 1996 Dollars in not comparable to output measure in 1973 Rubles. Similarly, labor input in thousands of workers is not comparable to labor input measured using an index.
3. Yes, it makes sense to compare growth rates in labor productivity. If we denote labor productivity as w=Y/L then growth rate of labor productivity can be written as Dw/w=DY/Y-DL/L. Growth in labor productivity is the difference between growth in real output and growth in labor input. Growth in real output will be the same whether it is denominated in Rubles or Dollars or whether it is valued in 1973 or 1996 prices. Similarly, growth in labor input will be the same whether we use the number of workers or an index. Hence, growth rates in labor productivity are comparable. Average labor productivity growth for the U.S. was 1.4% while for the U.S.S.R. it was 2.7%.
4. Labor productivity growth is higher in the U.S.S.R than in the U.S. This is not surprising given that the growth in capital stock in the U.S.S.R has been much faster than in the U.S. It is easier to increase labor productivity when capital stock increases at a very high rate. The amount of capital that Soviet workers had available to work with grew at much faster rate than the capital stock in the U.S.
5. Average investment share in the U.S. was 8.7% while the investment share in the U.S.S.R. was 16.6%. The U.S.S.R. contributed a much greater part of its aggregate output to investment instead of consumption. In order to maintain high growth rates, the U.S.S.R. had to use more and more of its output to generate capital stock. This resulted in lower consumption. Soviet people were forced to postpone (or sacrifice) consumption and produce investment rather than consumption goods.
6. From the 1950's to the 1970's there was a tendency to increase the investment share of output in the Soviet Union. There was an upward trend in the investment share. Trend in investment share is unsustainable because there is a maximum value for it - 100%. In this case all output is devoted to the production of capital goods and none to consumption goods. It is clear that a public outrage and starvation would stop any economy well short of the 100% maximum.

	50's	60's	70's	80's
U.S.	11	12	10	8
U.S.S.R.	18	20	22	21