Question

The dictator of a certain country requires that companies planning to open or expand must pay a large fee to file an application one year prior to building new factories or expanding existing ones. Other things the same, in the long run this requirement would

a. reduce real GDP per person but not productivity.

b. reduce real GDP per person and productivity.

c. reduce productivity but not real GDP per person.

d. None of the above is correct.

Answer 1

Answer:

The correct answer is b) reduce real GDP per person and productivity

Explanation:

Real GDP would fall first of all because GDP is measured annually, and under such measures, firms would have to delay production for a whole year, and all that opportunity cost would result in lower GDP.

Productivity would fall because firms are not being allowed to invest immediately on more capital (the new factories and expansion of existing ones). Factories are a type of capital, and capital is one of the factors of production (the other being labor). Productivity is defined as the ratio between output and inputs, and inputs are the factors of production:

Productivity = Output / capital + labor

In other words, if capital does not grow, productivity will not grow.