NANYANG TECHNOLOGICAL UNIVERSITY
SCHOOL OF SOCIAL SCIENCES
SEMESTER 1 AY21-22
HE1002 MACROECONOMICS I
PROBLEM SET 1
Question 1
Over the next 50 years the Japanese population is expected to decline, while the fraction of
the population that is retired is expected to increase sharply. What are the implications of
these population changes for total output and average living standards in Japan, assuming
that average labour productivity continues to grow? What if average labour productivity
stagnates?
Solution:
The relationship between total output and average labour productivity is given by:
𝑌𝑌
𝑌𝑌 = × 𝑁𝑁
𝑁𝑁
where Y is total output, Y/N is average labour productivity, N and the number of people
employed.
Declining population and an increased share of retired people imply a slower growth or even
a decline in the number of people employed. If average labor productivity continues to grow
at earlier rates, total output will still grow more slowly than before, because of slower growth
in the number of workers. If average labor productivity stagnates, then total output is likely
to decline.
Living standards depend on output divided by the total population. The relationship between
output per person and average labour productivity is given by:
𝑌𝑌 𝑌𝑌 𝑁𝑁
= ×
𝑃𝑃𝑃𝑃𝑃𝑃 𝑁𝑁 𝑃𝑃𝑃𝑃𝑃𝑃
where Y/POP is total output per person, Y/N is average labour productivity, N/POP is the share
of population employed.
Declining population reduces total output but also the number of people who share that
output. So a decline in the total population should not in itself affect living standards.
However, a reduced share of the population that is working, all else equal, will reduce output
per person, lowering living standards. Slower or no growth in productivity will only worsen
this problem.
Question 2
Is it possible for average living standards to rise during a period in which average labour
productivity is falling? Discuss, using a numerical example for illustration.
Solution:
It is possible, if the decline in average labor productivity (output per worker) is offset by an
increased share of the population that is employed. For a simple example, suppose an
economy has two people, one of whom is working. The one worker produces 50 units of
output, so average labor productivity is 50. Output per person (50/2) is 25. Now suppose that
average labor productivity drops to 40 but both people are working. Then total output is 80
and output per person is 40 so average living standards (output per person) rise even though
average labor productivity (output per employed worker) has fallen.
Question 3
What is human capital? Why is it economically important? How is new human capital created?
Solution:
Human capital is the talents, education, training, and skills of workers. Human capital is
important because workers with more human capital are more productive, implying higher
levels of output per worker and higher living standards. New human capital is created through
“investment in people”, as when individuals spend time and money acquiring an education,
or an employer devotes resources to training workers.
(All other reasonable answers are accepted.)
Question 4
Discuss how talented entrepreneurs and effective managers can enhance average labour
productivity.
Solution:
Entrepreneurs are people who create new business enterprises. By combining workers with
new and more productive technologies or by having the same workers produce more highly
valued products and services, entrepreneurs increase the productivity of any given set of
workers. Effective managers (who oversee the day-to-day operations of businesses) also
increase productivity, through activities such as improving the organization of production,
finding the best matches of workers and jobs, obtaining necessary financing, and coordinating
the firm's activities and needs with those of its suppliers and customers.
(All other reasonable answers are accepted.)