Problem:

Suppose an economy's real GDP is $5,000 billion. There are 125 million workers, each working an average of 2,000 hours per year.

1. What is the labor productivity per hour in this economy?
2. Suppose worker productivity rises by 5% over the following year and the labor force grows by 1%. What is the projected value of real GDP?
3. Based on your previous answer, what is this economy's rate of growth?

Answer:

1. Use the formula: labor productivity = real GDP / hours of work. There are 2,000 x 125 million = 250 billion worker hours available in the economy, producing a real GDP of $5,000 billion. Labor productivity is then $20 per worker hour. $20 = $5,000/250.
2. Productivity will rise to $21 (20 + .05 x 20 = 21) and work hours will rise to 252.5 billion (250 + .01 x 250 = 252.5). Since real GDP equals work hours times productivity, real GDP will rise to 275 billion x $21 = $5302.5 billion.
3. The rate of growth is approximately 6% [= 100 x (5,302.5 - 5,000) / 5,000].