Production and Growth

TRUE/FALSE
1. If per capita real income grows by 2 percent per year, then it will double in approximately 20 years.
2. Over the period 1870-2006, the United States experienced an average annual growth rate of real GDP per
person of about 4 percent per year.
3. In 2006, income per person in the United States was about 12 times that in India.
4. Over the period 1900-2006, Brazil’s rate of economic growth exceeded that of China.
5. If a country has a higher level of productivity than another, then it also has a higher level of real GDP.
6. International data on real GDP per person give us a sense of how standards of living vary across countries.
7. Real GDP per person in rich countries, such as Germany, is sometimes more than 10 times that of poor
countries like Pakistan.
8. Both the standard of living and the growth of real GDP per person vary widely across countries.
9. If they could increase their growth rates slightly, countries with low income would catch up with rich
countries in about ten years.
10. In the United States real GDP per person is about $44,000, while in some poor countries real GDP per person
is less than $3,000.
11. Although growth rates across countries vary some, rankings of countries by income remain pretty much the
same over time.
12. 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.
13. Productivity can be computed as number of hours worked divided by output.
14. Indonesians, for example, have a lower standard of living than Americans because they have a lower level of
productivity.
15. If Country A produces 6,000 units of goods and services using 600 hours of labor, and if Country B produces
5,000 units of goods and services using 450 units of labor, then productivity is higher in Country B than in
Country A.
16. Like physical capital, human capital is a produced factor of production.
17. Human capital is the term economists use to refer to the knowledge and skills that workers acquire through
education, training, and experience.
18. A forest is an example of a nonrenewable resource.
19. Historical trends in the prices of most natural resources compared to prices of other goods indicate that natural
resources have become scarcer over time.
20. It is possible for a country without a lot of domestic natural resources to have a high standard of living.
21. Constant returns to scale is the point on a production function where increasing inputs will no longer increase
output.
22. 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 is the existing amount of capital per worker.
23. An increase in the saving rate does not permanently increase the growth rate of real GDP per person.
24. Other things the same, another unit of capital will increase output by more in a poor country than in a rich
country.
25. The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely ever to
experience the economic growth rates of wealthier countries.
26. Two countries with the same saving rates must have the same growth rate of real GDP per person.
27. When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more than does
production in Russia (that is, Russian GDP).
28. If your company opens and operates a branch in a foreign country, you will be engaging in foreign direct
investment.
29. Investment in human capital has opportunity costs, but investment in physical capital does not.
30. 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.
31. A country that made its courts less corrupt and its government more stable would likely see its standard of
living rise.
32. If a country made it easier for people to establish and prove the ownership of their property, real GDP per
person would likely rise.
33. Economists generally believe that inward-oriented policies are more likely to foster growth than outward
oriented policies.
34. 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.
35. 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.
36. The population growth rate tends to be higher in developed countries than in developing countries.
37. In countries where women are discriminated against, policies that increase the likelihood of career success
and educational opportunities for women are likely to decrease the birth rate.
38. Countries with high population growth rates tend to have lower levels of educational attainment.
39. Studies confirm that controlling for other variables such as the percentage of GDP devoted to investment, poor
countries tend to grow at a faster rate than rich countries.
40. An increase in capital increases productivity only if it is purchased and operated by domestic residents.
41. Other things the same, an economy’s factors of production are likely to be used more effectively if there is an
economywide respect for property rights.
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 Real GDP (2000 prices) Population

1987 $6,435,000 million 243 million
2005 $11,092,000 million 296.6 million

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.

3. What is a production function? Write an equation for a typical production function, and explain what each of
the terms represents.

4. What is the difference between human capital and 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.

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?

7. In addition to investment in physical and human capital, what other public policies might a country adopt to
increase productivity?

8. Why does a nation’s standard of living depend on property rights?

9. How do outward-oriented policies affect a nation's productivity?

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.
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?