Economic Growth - One Third Rule

Hi guys, a simple point below but the book seems to contradict itself (CFAI Book, Economics pg 482) "One third rule, that on the average, with (!)no change in technology(!) a 1 percent increase in capital per hour of labor brings a 1/3 percent increase in labor productivity. The one third rule is used to calculate the contributions of an increase in capital per hour of labor and (!) technological change(!) to the growth of labor productivity. The (!) I have added but how can we assume no tech change and then use the results to calculate a tech change? Thanks for any help.

Hi, There is no contradiction in the statement. Say that you know that the capital increase was 6 percent in a period while the the growth of labor productivity turned out to be 5 percent. According to the one third rule, had there been no change in technology the increase in labor productivity should have stayed at 6/3=2 percent. However, since the growth is larger, you infer that technology has also changed and the countribution of the technology is 5-2=3 percent.

Econ is screwed man. You can convince anyone whatever you want. Long term effect, short term effect. grr

Thanks Revisor, thats what the book should have said. Much clearer!

Revisor’s explanation is very good, except for one point: the increase of 6% in capital has to be a 6% increase in capitl PER HOUR OF LABOR. if it was just an absolute increase of 6%, but the labour force provided 10% more hours of labour, then the rest of his scenario would not be true (capital per hour of labour would have actually decreased relative to before, and for productivity to still have grown, technological improvement would have had to be that much greater).