Assume the income per worker in the United States in a particular year was $98,1

Question

Assume the income per worker in the United States in a particular year was $98,195 and the income per worker in the UK that same year was $71,603. The income per worker in the UK if the technology were at US level would be $85,548.

a. Compute the total gap in income per worker between the US and the UK. What part of the income per worker gap between the US and the UK can be explained by differences in technology? What part of the income per worker gap between the US and the UK can be explained by differences in human capital and physical capital?

b. Assume years of schooling underestimate the skills of workers in the US.Discuss the effect of this measurement error on the decomposition you computed in part a   

Explanation / Answer

a) Total gap in income per worker between US and UK =$98,195 - $71,603 = $26592

income per worker gap between the US and the UK explained by differences in human capital and physical capital = $98,195 -  $85,548 = $12647

income per worker gap between the US and the UK explained by differences in technology =  $85,548 - 71,603 = $13939

b) If the skills of workers have been underestimated in US then there would have been higher income per worker in ayear to which the differences calculated in part a will be more of each.

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