1688 ? Chapter 25 /Production and Growth
4. What is the difference between human capital and technology?ANS:
Technology is society's understanding of production techniques. Human capital is the labor force's understanding of these ideas. A society may have lots of information available about how to produce goods, but still have lots of people who know little of this information. For example, in the United States there exists information about how best to use a butter churn and how to make lye soap, but most people know nothing about it.
DIF: 2 REF: 25-2 LOC: Productivity and growth TOP: MSC: Interpretive
NAT: Analytic
Human capital | Technology
5.
The catch-up effect says that countries with low income can grow faster than countries with higher income. However, in statistical studies that include many diverse countries we do not observe the catch-up-effect
unless we control for other variables that affect productivity. Considering the determinants of productivity, list and explain some things that would tend to prohibit or limit a poor country's ability to catch up with the rich ones.ANS:
The argument that poor countries will tend to catch up with rich ones is based on the idea that another unit of capital will increase output more in a country that has little capital than one that has much capital. So, for a given share of GDP devoted to investment, a poor country will grow faster than a rich one.
This argument assumes that other things are the same, but share of GDP invested may be lower in a poor country and the productivity of investment may be less. A politically unstable environment where property rights are unprotected or not secure tends to discourage investment. A country that has limited trade because of legal
restrictions or geography cannot focus on producing what it produces best and so has lower productivity. To get the most out of investment, or even simply to use some types of new investment, requires having workers who have acquired some basic human capital.
DIF: 3 REF: 25-3 LOC: Productivity and growth TOP: MSC: Analytical
NAT: Analytic Catch-up effect
6.
Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from 1960-1991. However, during these same years South Korea had a 6
percent growth rate of average annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different?ANS:
The explanation is based on the concept of diminishing returns to capital. A country that has a lot of income, and so a lot of capital, gains less by adding more capital than does a country that currently has little capital. It is easy to envision how a poor country without much capital could increase its output considerably with even a little more capital.
DIF: 2 REF: 25-3 LOC: Productivity and growth TOP: MSC: Analytical
NAT: Analytic
Investment | Catch-up effect | Diminishing returns
7.
In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?ANS:
In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.
DIF: 2 REF: 25-3 LOC: Productivity and growth TOP: NAT: Analytic Productivity
MSC: Definitional
Chapter 25 /Production and Growth ? 1689
8. Why does a nation’s standard of living depend on property rights?
ANS:
Property rights are an important prerequisite for the price system to work in a market economy. If an individual or company is not confident that claims over property or over the income from property can be protected, or that contracts can be enforced, there will be little incentive for individuals to save, invest, or start new businesses. Likewise, there will be little incentive for foreigners to invest in the real or financial assets of the country. The
distortion of incentives will reduce efficiency in resource allocation and will reduce saving and investment which in turn will reduce the standard of living.
DIF: 2 REF: 25-3 LOC: Productivity and growth TOP: MSC: Interpretive
NAT: Analytic Property rights
9. How do outward-oriented policies affect a nation's productivity?ANS:
Most economists believe that poor nations are better off pursuing outward-oriented policies that promote free trade. Countries that use their comparative advantage in trade are, in effect, helping themselves through the gains from trade in the same way that nations that develop new technology raise their standard of living. Hence, a country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance. Inward-oriented trade policies are akin to a country choosing to restrict the use of superior technologies.
DIF: 1 REF: 25-3 LOC: Productivity and growth TOP: MSC: Interpretive
NAT: Analytic Economic growth
10. At first patents might seem like a deterrent to growth because in effect they restrict the use of new technology.
Yet many economists believe that patents generate growth. Explain why.ANS:
Once someone comes up with an idea it is often easy for others to take advantage of it so that the idea becomes part of a society’s knowledge. So, knowledge is frequently a public good. Without patents an inventor’s reward for research and development of a good idea would be smaller. So, patents increase the incentives for firms and
individuals to engage in research. The negative consequences of temporarily restricting the use of new ideas with patents is outweighed by the increase in new ideas that patents induce.
DIF: 2 REF: 25-3 LOC: Productivity and growth TOP: MSC: Interpretive
NAT: Analytic Economic growth
11. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an
economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?ANS:
Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.
DIF: 2 REF: 25-3 LOC: Productivity and growth TOP: MSC: Interpretive
NAT: Analytic
Population growth | Standard of living
1690 ? Chapter 25 /Production and Growth
12. Compare and contrast the population theories of Malthus and Kremer.ANS:
The difference is that Malthus predicted that population growth would be greater than growth in the ability to increase output. He believed that people would continue to populate the earth until output reached a subsistence level. On the other hand Kremer argues that population growth increased productivity allowing people to improve their standard of living despite growing population. Kremer argues that with more population comes more
innovations. The improvements in technology outweighed any adverse impact of the increase in population on the standard of living.
DIF: 2 REF: 25-3 LOC: Productivity and growth TOP: MSC: Interpretive
NAT: Analytic
Population growth | Economists
Sec00 - Production and Growth
MULTIPLE CHOICE1.
The average income in a rich country, such as the United States or Japan, is more than
a. 3 times, but less than 5 times, the average income in a poor country, such as Indonesia or Nigeria. b. 5 times, but less than 10 times, the average income in a poor country, such as Indonesia or Nigeria. c. 10 times, but less than 20 times, the average income in a poor country, such as Indonesia or
Nigeria.
d. more than 20 times the average income in a poor country, such as Indonesia or Nigeria.
DIF: 1 REF: 25-0 LOC: Productivity and growth TOP:
ANS: C
NAT: Analytic MSC: Definitional2.
Economic growth
Over the past century in the United States, real GDP per person has grown, on average, by about a. 1 percent per year. b. 2 percent per year. c. 3 percent per year. d. 5 percent per year.
DIF: 1 REF: 25-0 LOC: Productivity and growth TOP:
ANS: B
NAT: Analytic MSC: Definitional3.
Economic growth
During the past century the average growth rate of U.S. real GDP per person implies that it doubled, on average, about every a. 100 years. b. 70 years. c. 35 years. d. 25 years.
DIF: 1 REF: 25-0 LOC: Productivity and growth TOP:
ANS: C
NAT: Analytic MSC: Interpretive4.
Economic growth
In the United States, as measured by real GDP per person, average income is about how many times as high as average income a century ago? a. 2 b. 4 c. 6 d. 8
DIF: 1 REF: 25-0 LOC: Productivity and growth TOP:
ANS: D
NAT: Analytic MSC: Definitional
Economic growth
Chapter 25 /Production and Growth ? 1691
5.
Over the last century, U.S. real GDP per person grew at a rate of about
a. 2 percent per year, so that it is now 2 times as high as it was a century ago. b. 2 percent per year, so that it is now 8 times as high as it was a century ago. c. 4 percent per year, so that it is now 2 times as high as it was a century ago. d. 4 percent per year, so that it is now 8 times as high as it was a century ago.
DIF: 1 REF: 25-1 LOC: Productivity and growth TOP:
ANS: B
NAT: Analytic MSC: Definitional6.
Economic growth
Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If, in the next 100 years, it doubles every 25 years, then a century from now U.S. real GDP per person will be a. 4 times higher than it is now. b. 8 times higher than it is now. c. 12 times higher than it is now. d. 16 times higher than it is now.
DIF: 2 REF: 25-1 LOC: Productivity and growth TOP:
ANS: D
NAT: Analytic MSC: Interpretive7.
Economic growth
Over the past century in the United States, average income as measured by real GDP per person has grown about
a. 4 percent per year, which implies a doubling about every 18 years. b. 4 percent per year, which implies a doubling about every 8 years. c. 2 percent per year, which implies a doubling about every 35 years. d. 2 percent per year, which implies a doubling about every 18 years.
DIF: 2 REF: 25-1 LOC: Productivity and growth TOP:
ANS: C
NAT: Analytic MSC: Interpretive8.
Economic growth
In which of the following countries has economic growth been sufficiently strong in recent history to propel that country from being among the poorest in the world to being among the richest in the world? a. India b. Mexico c. Nigeria d. Singapore
DIF: 1 REF: 25-0 LOC: Productivity and growth TOP:
ANS: D
NAT: Analytic MSC: Definitional9.
Economic growth
Average income has been stagnant for many years in a. Argentina. b. Singapore. c. Nigeria.
d. All of the above are correct.
DIF: 1 REF: 25-1 LOC: Productivity and growth TOP:
ANS: C
NAT: Analytic MSC: Definitional
Economic growth
1692 ? Chapter 25 /Production and Growth
10. Which of the following statements is correct?
a. The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a
good gauge of economic progress.
b. The level of real GDP is a good gauge of economic progress, and the growth of real GDP is a good
gauge of economic prosperity.
c. The level of real GDP is a good gauge of economic prosperity, and the level of real GDP per person
is a good gauge of economic progress.
d. The level of real GDP is a good gauge of economic progress, and the level of real GDP per person
is a good gauge of economic prosperity.
ANS: A
NAT: Analytic MSC: Interpretive
DIF: 2 REF: 25-0 LOC: Productivity and growth TOP:
Economic growth
Sec01 - Production and Growth - Economic Growth around the World
MULTIPLE CHOICE1.
You are told that Country A experienced growth of real GDP per person of 4 percent per year throughout the 1900s. In view of other countries’ experience, you would have to characterize Country A’s growth as a. exceptionally high. b. moderately high. c. moderately low. d. exceptionally low.
DIF: 1 REF: 25-1 LOC: Productivity and growth TOP:
ANS: A
NAT: Analytic MSC: Interpretive2.
Economic growth
You are told that Country A experienced growth of real GDP per person of 0.5 percent per year throughout the 1900s. In view of other countries’ experience, you would have to characterize Country A’s growth as a. exceptionally high. b. moderately high. c. moderately low. d. exceptionally low.
DIF: 1 REF: 25-1 LOC: Productivity and growth TOP:
ANS: D
NAT: Analytic MSC: Interpretive3.
Economic growth
As of 2006, using real GDP per person as a measure, we would classify
a. the United States and Mexico as advanced economies and Bangladesh as a middle-income country. b. Canada as an advanced economy, Mexico as a middle-income country, and Mali as a poor country. c. Japan and India as advanced economies and Mexico as a poor country.
d. Japan as an advanced economy, the United Kingdom as a middle-income country, and Argentina as
a poor country.
DIF: 2 REF: 25-1 LOC: Productivity and growth TOP:
ANS: B
NAT: Analytic MSC: Interpretive4.
Standard of living
Over the period 1900-2006, which of the following countries experienced the highest average annual growth rate of real GDP per person? a. Indonesia b. India c. Pakistan d. Brazil
DIF: 2 REF: 25-1 LOC: Productivity and growth TOP:
ANS: D
NAT: Analytic MSC: Definitional
Economic growth