All other things being equal, an increase in a country’s total factor productivity will:

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The prompt presents a question about macroeconomic growth and lists a single provided answer, but no answer choices are actually given to evaluate. Nevertheless, we can reason through the statement that is provided as the answer.

Question restated: All other things being equal, an increase in a country’s total factor productivity will:

Given option (provided): increase a country’s steady-state level of income, saving and replacement investment per capita.

Analysis of the claim:
- Total factor productivity (TFP) measures how efficiently inputs (capital and labor) are turned into output. An increase in TFP raises output for any given amount of input.
- In a standard Solow-type model with exogenous growth factors, a rise in TFP shifts the production function upward. This elevates output per worker (income per capita) at every level of capital per worker.
- Saving behavior is typically a fixed fraction of income. If income rises due to higher TFP, saving per capita (the saving rate times income) also rises in absolute terms, assuming the saving rate remains constant. Because saving finances investment, this leads to a higher investment per capita.
- The steady-state concept implies a balance between investment and depreciation to maintain the capital stock. With a higher level of income and hence higher saving (and thus higher investment per capita) at any given capital stock, the steady-state level of capital per worker may rise, leading to a higher steady-state income per capita as well.
- The phrase “replacement investment per capita” typically refers to the investment needed to replace depreciated capital to keep the capital stock constant. If the economy moves to a higher steady-state capital per worker due to the productivity/shock, the required replacement investment per capita also increases to maintain that higher capital stock. Thus, it is consistent that replacement investment per capita would be higher in the new steady state.

Overall interpretation: The statement aligns with the intuitive and formal implications of a positive TFP shock in growth models: higher income per capita at the new steady state, higher saving per capita (from higher income), and higher investment per capita required to sustain the larger capital stock (replacement investment).

Why this reasoning would differ from alternative possibilities (in a set of options):
- If an option claimed that steady-state income did not change, that would contradict the standard result that a productivity improvement raises the level of output per worker.
- If an option claimed that saving or investment per capita would fall, that would ignore the direct link from higher income to higher saving (given a fixed saving rate) and the resulting need for more investment to support the higher capital stock.
- If an option claimed the effect only applied to growth rate and not the level, that would misstate the typical Solow model outcome where a permanent productivity increase raises the steady-state level, not merely the growth rate (assuming a stable long-run path with no additional shocks).

In summary, given the standard interpretation of a TFP increase in a growth framework, the proposed outcome—that steady-state income, saving per capita, and replacement investment per capita rise—is internally consistent with the mechanics of higher output, higher savings, and a higher steady-state capital stock.

ECON1002 Introductory Macroeconomics

All other things being equal, an increase in a country’s total factor productivity will:

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