Economics 532

Problem Set 7

Spring 1998

This problem set is based on data from Appendix A of Agricultural Development: An International Perspective (1985) by Yujiro Hayami and Vernon Ruttan. Total agricultural output is in thousands of wheat equivalent units (i.e. the value of total production, evaluated at international prices, divided by the international price of wheat). Labor is measured in thousands of male agricultural workers engaged in agriculture. Capital is measured in thousands of horsepower, aggregating over riding and garden tractors engaged in agricultural production. Wages are the daily rate paid per worker, in U.S. dollars.

You can access the data in Excel format on the Economics 532 Web Page at www.econ.iastate.edu/orazem/ undet the Data Sets heading. It is entitled "International Agricultural Data".

1) Compute the labor per unit of output (L/Q) and capital per unit of output (K/Q) for each country. Plot K/Q against L/Q. What do you get? How does the plot relate to an isoquant?

2) If things worked out properly, you have a downward sloping relationship between K/Q and L/Q. What countries have atypically high K/Q? What countries have atypically high L/Q?

3) Compute the capital-labor ratios for each country (K/L). Plot these against agricultural wages. What relationship do you get? How would you explain this using economic theory? Note that you will need to drop countries with missing values on wages from the plot. In Excel, you can sort the data by wage and then restrict the plot to the countries with positive wage values.

4) Compute unit labor costs for each country (=WL/Q). What countries have the lowest unit labor costs? What countries have the highest unit labor costs? Plot these unit labor costs against wages. What relationship exists? Are low wages necessary for low unit labor costs?

5) Notice that unit labor costs can be rewritten as the ratio of W to Q/L. What is Q/L? If a country has high wages, what must be true about labor productivity if the country is to have low unit labor costs?