1076 ? Chapter 25/Production and Growth
199. Which of the following World Bank poverty aid programs did the Poverty Action Lab find to have no beneficial
effects?
a. hiring high-school graduates to tutor groups of lagging students in Bombay slums b. adding an extra teacher to classrooms in rural India
c. giving poor Kenyan students drugs to treat intestinal worms
d. All of the above programs were shown to have no beneficial effects. ANS: B PTS: 1 DIF: 2 REF: 25-3 TOP: World Bank poverty aid MSC: Definitional 200. Economists differ in their views of the role of the government in promoting economic growth. According to the text,
at the very least, the government should
a. lend support to the invisible hand by maintaining property rights and political stability. b. limit foreign investment to industries that don't already exist in the country.
c. impose trade restrictions to protect the interests of domestic producers and consumers. d. subsidize key industries. ANS: A PTS: 1 DIF: 1 REF: 25-4 TOP: Growth policy MSC: Applicative
True/False
1. Real GDP per-capita in rich countries, such as Germany, is sometimes more than 10 times that of poor countries like
Pakistan. ANS: T PTS: 1 DIF: 1 REF: 25-1 TOP: Economic growth around the world MSC: Definitional 2. Both the standard of living and the growth of real GDP per person vary widely across countries. ANS: T PTS: 1 DIF: 1 REF: 25-1 TOP: Economic growth around the world MSC: Definitional
3. If they could increase their growth rates slightly, countries with low income would catch up with rich countries in
about ten years. ANS: F PTS: 1 DIF: 1 REF: 25-1 TOP: Growth | Catch-up effect MSC: Definitional
4. In the United States real GDP per person is about $37,500, while in some poor countries real GDP per person is less
than $3,500. ANS: T PTS: 1 DIF: 1 REF: 25-1 TOP: Growth MSC: Definitional
5. Although growth rates across countries vary some, rankings of country by income remain pretty much the same over time. ANS: F PTS: 1 DIF: 1 REF: 25-1 TOP: Economic growth around the world MSC: Definitional
6. International data on the history of real GDP growth rates shows that over the last 100 years or so, rich countries got
richer and poor countries got poorer. ANS: F PTS: 1 DIF: 1 REF: 25-1 TOP: Economic growth around the world | Catch-up effect MSC: Definitional 7. Productivity can be found as number of hours worked divided by output. ANS: F PTS: 1 DIF: 1 REF: 25-2 TOP: Productivity MSC: Definitional
8. Indonesians, for example, have a lower standard of living than Americans because they have a lower level of
productivity. ANS: T PTS: 1 DIF: 1 REF: 25-2 TOP: Productivity | Standard of living MSC: Interpretive
9. As capital per worker rises, output per worker rises. However, the increase in output per worker from an addition to
capital is smaller the larger the existing amount of capital per worker. ANS: T PTS: 1 DIF: 1 REF: 25-2 TOP: Production function MSC: Analytical
Chapter 25/Production and Growth ? 1077
10. A forest is an example of a nonrenewable resource.
ANS: F PTS: 1 DIF: 1 REF: 25-2 TOP: Natural resources MSC: Definitional
11. Historical trends in the prices of most natural resources compared to other goods indicate that natural resources
became scarcer over time. ANS: F PTS: 1 DIF: 1 REF: 25-2 TOP: Natural resources MSC: Definitional 12. It is possible for a country without a lot of domestic natural resources to have a high standard of living. ANS: T PTS: 1 DIF: 1 REF: 25-2 TOP: Natural resources MSC: Interpretive
13. Constant returns to scale is the point on a production function where increasing inputs will no longer increase output. ANS: F PTS: 1 DIF: 2 REF: 25-2 TOP: Constant returns to scale MSC: Interpretive 14. An increase in the saving rate does not permanently increase the growth rate of real GDP per person. ANS: T PTS: 1 DIF: 2 REF: 25-3 TOP: Saving rate MSC: Definitional
15. Other things the same, another unit of capital will increase output by more in a poor country than in a rich country. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Productivity | Diminishing returns MSC: Applicative 16. Two countries with the same saving rates must have the same growth rate of real GDP per person. ANS: F PTS: 1 DIF: 1 REF: 25-3 TOP: Saving rate | Catch-up effect MSC: Definitional
17. If your company opens and operates a branch in a foreign country, you will be engaging in foreign direct investment. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Foreign direct investment MSC: Definitional
18. Investment in human capital has opportunity costs, but investment in physical capital does not. ANS: F PTS: 1 DIF: 1 REF: 25-3 TOP: Capital | Opportunity costs MSC: Interpretive
19. Incentives for parents to send their children to school, such as small monthly payments to parents if their children
have regular attendance, appear to increase school attendance. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Education MSC: Definitional
20. A country that made their courts less corrupt and their government more stable would likely see their standard of
living rise. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Property rights | Political stability MSC: Definitional 21. If a country made it easier for people to establish and prove the ownership of their property, real GDP per person
would likely rise. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Property rights | Political stability MSC: Interpretive 22. Economists generally believe that inward-oriented policies are more likely to foster growth than outward oriented
policies. ANS: F PTS: 1 DIF: 1 REF: 25-3 TOP: Trade policy MSC: Definitional 23. If a rich country reduced subsidies to domestic producers who produce goods for which poor countries have a
comparative advantage, the standard of living in these poor countries would likely rise. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Trade policy MSC: Definitional
1078 ? Chapter 25/Production and Growth
24. One reason that governments may find it useful to sponsor universities and basic research is that to a large extent
knowledge is generally a private good. ANS: F PTS: 1 DIF: 1 REF: 25-3 TOP: Public goods MSC: Interpretive 25. The population growth rate tends to be higher in developed countries than in developing countries. ANS: F PTS: 1 DIF: 1 REF: 25-3 TOP: Population MSC: Definitional
26. In countries where women are discriminated against, policies that increase their career and educational opportunities
are likely to decrease the birth rate. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Population MSC: Definitional
27. Countries with high population growth rates tend to have lower levels of educational attainment. ANS: T PTS: 1 DIF: 1 REF: 25-3 TOP: Population MSC: Definitional
28. Michael Kramer found that world growth rates fell as population increased. ANS: F PTS: 1 DIF: 1 REF: 25-3 TOP: Population MSC: Definitional
Short Answer
1. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use these numbers to compute the percentage increase in real GDP per person from 1987 to 2005.
Year 1987 2005 Real GDP (2000 prices) $6,435,000 million $11,092,000 million Population 243 million 296.6 million
ANS:
Real GDP per person in 1987 was $6,435,000/243= about $26,481 income per person in 2005 was $11,092,000/296.6 = about $37,397. Income per person grew by (37,397 - 26,481)/26,481 = about 41.2 percent. PTS: 1 DIF: 1 REF: 25-1 TOP: Real GDP per person | Growth MSC: Applicative
2. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and
standard of living mean. Make a list of things that determine labor productivity. ANS:
The standard of living is a measure of how well people live. Income per person is an important dimension of the standard of living and is positively correlated with other things such as nutrition and life expectancy that make people better off. Productivity measures how much people can produce in an hour. As productivity increases, people can produce more (and use less to produce the same amount) and so their standard of living increases.
The factors that determine labor productivity include the amounts of physical capital (equipment and structures), human capital (knowledge and skills), and natural resources available to workers, as well as the state of technological knowledge in society. PTS: 1 DIF: 2 REF: 25-1 TOP: Productivity | Standard of living MSC: Definitional
3. What is a production function? Write an equation for a typical production function, and explain what each of the
terms represents. ANS:
A production function is a mathematical representation of the relationship between the quantity of inputs used in
production and the quantity of output produced using these inputs. A typical production function could be written as Y = A F(L, K, H, N), where Y denotes the quantity of output, L the quantity of labor, K the quantity of physical capital, H the quantity of human capital, N the quantity of natural resources, and A is a variable that reflects the available production technology. PTS: 1 DIF: 2 REF: 25-2 TOP: Production function MSC: Interpretive
Chapter 25/Production and Growth ? 1079
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. PTS: 1 DIF: 2 REF: 25-2 TOP: Capital | Technological knowledge MSC: Interpretive
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. PTS: 1 DIF: 3 REF: 25-3 TOP: Catch-up effect MSC: Analytical
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, 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. PTS: 1 DIF: 2 REF: 25-3 TOP: Investment | Catch-up effect | Diminishing returns MSC: Analytical
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. PTS: 1 DIF: 2 REF: 25-3 TOP: Growth policies MSC: Definitional 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. PTS: 1 DIF: 2 REF: 25-3 TOP: Property rights MSC: Interpretive
1080 ? Chapter 25/Production and Growth
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. PTS: 1 DIF: 1 REF: 25-3 TOP: Trade policy MSC: Interpretive 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. PTS: 1 DIF: 2 REF: 25-3 TOP: Patents MSC: Interpretive 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. PTS: 1 DIF: 2 REF: 25-3 TOP: Education MSC: Interpretive
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. PTS: 1 DIF: 2 REF: 25-3 TOP: Population MSC: Interpretive