Question

Real GDP equals _________ times _________.

a. average hours of work; quantity of capital

b. average hours of work; allocative efficiency

c. labor input; labor productivity

d. natural resources; improvements in technology

Short answer

Option (c). labor input; labor productivity

Step-by-step solution

Step 1. Reason behind the option (a)

Option (a) completes the statement as, “Real GDP equals average hours of work times the quantity of capital. It states about the quantity of capital available to the labor inputs (average hours of work). This statement is not aligned with the correct definition of real GDP. Thus, this option is incorrect.

Step 2. Reason behind option (b)

Option (b) completes the statement as, “Real GDP equals average hours of work times the allocative efficiency. Allocative efficiency is one of the factors which improves labor productivity. It does not represent labor productivity. Hence the statement is not aligned with the definition of real GDP. Therefore, this option is incorrect.

Step 3. Reason behind option (c)

Option (c) completes the statement as,“ Real GDP equals labor inputs times the labor productivity. The definition of real GDP is also measured by multiplying the labor inputs (hours of work) with labor productivity (average output per hour). The statement aligns with the definition of real GDP. Therefore, the option is correct.

Step 4. Reason behind option (d)

Option (d) completes the statement as, “Real GDP equals natural resources times the improvements in technology. Real GDP does not measure the natural resources as it is used as input. And improvement in technology is one of the factors to improve labor productivity but it is not used for defining any change in real GDP. The multiplication of both will not align with the definition of real GDP. Therefore, this option is incorrect.