Question

In the year 2010, the income per worker in the United States was $82,359 and the income per worker in South Korea was $54,315. The income per worker in South Korea if the technology were at US level would be $74,496. What part of the income per worker gap between the US and South Korea can be explained by differences in human capital and physical capital

Answer 1

Answer:

The difference in human capital explains $7,863 of the income per worker gap while the difference in physical capital explains $20,181 of the income per worker gap.

Explanation:

Human capital refers to the skills, knowledge, and efforts of the people in producing goods and services. It is also known simply as labor. Physical capital refers to the "man-made" goods that assist in production, including machinery, equipment, and technological items such as computers.

In the given scenario, the income per worker in the United States is $82,359 - $54,315 = $28,044 more than the income per worker in South Korea. This is explained by differences in both the level of technology (i.e. physical capital) and the capability of workers (i.e. human capital).

We are informed that the income per worker in South Korea would be $74,496 if it had the same level of technology as the United States. This means that $74,496 - $54,315 = $20,181 of the income per worker gap between the two countries is explained by differences in physical capital. Hence the remaining difference of $28,044 - $20,181 = $7,863 is explained by differences in human capital between the two countries.