Chap 24

Chapter 24
Production and Growth
MULTIPLE CHOICE
1
.
A nation’s standard of living is measured by its
a. nominal GDP.
b. nominal GDP per person.
c. real GDP.
d. real GDP per person.
ANSWER: d. real GDP per person.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
2
.
The income per person in rich countries like Japan, the United States, and
West Germany is about how many times that in developing countries such as
India and Indonesia?
a. no more than 2
b. 4
c. 6
d. 10 or more
ANSWER: d. 10 or more
1
ANSWER:
d. real GDP per person.
2
~ANSWER:
d. 10 or more
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 1
2 Chapter 24/Production and Growth
3
. Over the past century in the United States, real GDP per person has grown by
about
a. 2 percent per year.
b. 4 percent per year.
c. 6 percent per year.
d. 10 percent per year.
e. None of the above are correct.
ANSWER: a. 2 percent per year.
4
. Over the past century in the United States, average income as measured by
real GDP per person has grown at an average annual rate that implies should
double about every
a. 20 years.
b. 25 years.
c. 35 years.
d. 45 years.
ANSWER: c. 35 years.
5
. Over the past century in the United States, average income as measured by
real GDP per person has grown about
a. 1 percent per year, which implies a doubling about every 65 years.
b. 2 percent per year, which implies a doubling about every 35 years.
c. 4 percent per year, which implies a doubling about every 20 years.
d. None of the above are correct.
ANSWER: b. 2 percent per year, which implies a doubling about every 35 years.
6
. In the United States, as measured by real GDP, average income is about how
many times as high as average income a century ago?
a. 4
b. 8
c. 12
d. 16
ANSWER: b. 8
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 24/Production and Growth 3
7
. In recent decades, average income in some East Asian countries, such as Hong
Kong, Singapore, and Taiwan, has risen about
b. 2 percent per year.
c. 4 percent per year.
ANSWER: d. 7 percent per year.
8
. In some East Asian countries, average income, as measured by real GDP per
person, has grown at an average annual rate that implies output should double
about every
a. 10 years.
b. 15 years.
c. 25 years.
d. 35 years.
ANSWER: a. 10 years.
9
. In the length of one generation, which of the following countries has gone
from being among the poorest countries in the world to being among the
richest?
a. Chad
b. Ethiopia
c. South Korea
d. All of the above are correct.
ANSWER: c. South Korea
10
. Average income has been stagnant for many years in
a. Ethiopia.
b. Ireland.
c. Singapore.
ANSWER: a. Ethiopia.
11
. Which of the following is not true?
a. Growth rates of real GDP per person vary substantially from country to
country.
b. GDP measures total expenditures and total income.
c. Richer countries have more televisions, better nutrition, better health care,
and longer life expectancy.
d. Productivity is not closely linked to government policies.
ANSWER: d. Productivity is not closely linked to government policies.
12
. Which of the following is measured by real GDP?
a. total real output
b. productivity
c. macroeconomic prices
ANSWER: a. total real output
13
. The amount of goods and services produced from each hour of a worker's time
is called
a. per capita GDP.
b. per capita GNP.
c. the standard of production.
d. productivity.
ANSWER: b. productivity.
14
. A nation's standard of living is determined by
a. productivity.
b. gross domestic product.
c. national income.
d. how much it has relative to others.
ANSWER: a. productivity.
15
. Which of the following is correct?
a. Both levels and growth rates of real GDP per person are diverse across
countries.
b. People in countries where real GDP growth was higher over the last 100
years have higher standards of living than people in all countries where
real GDP growth was smaller.
c. The typical citizen of China has about as much real income as the typical
American in 1950.
ANSWER: a. Both levels and growth rates of real GDP per person are diverse
across countries.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
16
. In 1997, the typical Pakistani had about how many times the income of the
typical American in 1870?
a. 1/3
b. 1/2
c. 2
d. 3
ANSWER: b. 1/2
17
. In 1997, the typical citizen of China had about as much real income as the
typical American in
a. 1870.
b. 1920.
c. 1945.
d. 1970.
ANSWER: a. 1870.
18
. Of the following countries, which had the highest growth rate over the last 100
years?
a. Brazil
b. Germany
c. United Kingdom
d. United States
ANSWER: a. Brazil
19
. Countries that grew the fastest over the last 100 years had growth rates of
about
a. 0.3 percent.
b. 1.0 percent.
c. 3.0 percent.
d. 5.0 percent.
ANSWER: c. 3.0 percent.
20
a. Countries with the highest growth rates are the ones that had the highest
level of real GDP 100 years ago.
b. The ranking of countries by income changes substantially over time.
c. Most countries have had little fluctuation around their average growth
rates.
d. Over the last 100 years, Japan had the highest real GDP growth rate, and
now has the highest real GDP per person.
ANSWER: b. The ranking of countries by income changes substantially over time.
21
. Over the last 100 years which of the following had growth rates higher than
that of the United States?
a. Brazil
b. Japan
c. China
ANSWER: d. All of the above are correct.
22
. Which of the following nations experienced average rates of economic growth
of less than 1.0 percent over the last 100 years?
a. Bangladesh
b. China
c. United States
d. India
ANSWER: a. Bangladesh
23
. In 1870, the richest country in the world was
a. Germany.
b. the United Kingdom.
c. the United States.
d. Russia.
ANSWER: b. the United Kingdom.
24
. In 2000, Erehwon had a population of 4,000 and real GDP of about
12,000,000. In 1999 it had a population of 3,500 and real GDP of about
9,625,000. What was the growth rate of real GDP per person in Erehwon
between 1999 and 2000?
a. about 25 percent
b. about 14 percent
c. about 9 percent
ANSWER: c. about 9 percent
TYPE: M DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM:
Y
25
. Compounding refers to
a. the adjustment made to GDP meant to take out the effects of inflation.
b. the geometric smoothing of productivity data.
c. the accumulation of a growth rate over a period of time.
d. the increase in a growth rate over a period of time.
ANSWER: c. the accumulation of a growth rate over a period of time.
26
. Using the "rule of 70," calculate how many years it would take for John's
income to double if he were to experience a 4 percent increase in income per
year.
a. 35 years
b. 28 years
c. 22 years
d. 17.5 years
ANSWER: d. 17.5 years
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
27
. If James expects to have a 10 percent salary increase each year, how long will
it take for his salary to double according to the “rule of 70”?
a. 5 years
b. 7 years
c. 14 years
d. 20 years
ANSWER: b. 7 years
28
. According to the “rule of 70,” if a country has a growth rate of about .70
percent per year it will take about
a. 100 years for their output to double, but only take about 49 years to double
if their growth rate was 3 percent.
b. 100 years for their output to double, but only take about 23 years to double
c. 49 years for their output to double, but only take about 23 years to double
d. 49 years for their output to double, but only take about 10 years to double
ANSWER: b. 100 years for their output to double, but only take about 23 years to
double if their growth rate was 3 percent.
29
. According to the “rule of 70,” about how many more years does it take the
output of a country to double if its output grows at 2 percent per year instead
of 3 percent per year?
a. 23 years
b. 21 years
c. 12 years
d. 7 years
ANSWER: c. 12 years
30
. Ben Franklin died and left $5,000 to be invested for a period of 200 years to
benefit medical students and scientific research. According to the “rule of 70,”
how often would this money have doubled if it grew 10 percent per year every
year?
a. every 10 years
b. every 7 years
c. every 5 years
d. every 3.5 years
ANSWER: b. every 7 years
31
. According to the rule of 70, if some variable grows at a rate of x percent per
year, then that variable doubles in approximately
a. 70x years.
b. 70/x years.
c. x/70 years.
d. 70(1 – x) years.
ANSWER: b. 70/x years.
32
. Productivity
a. is the same across countries and so provides no help explaining differences
across countries in the standard of living.
b. explains very little of the differences across countries in the standard of
living.
c. explains some, but not most of the differences across countries in the
standard of living.
d. explains most of the differences across countries in the standard of living.
ANSWER: d. explains most of the differences across countries in the standard of
living.
33
. Which of the following is a correct way to measure productivity?
a. compute output growth
b. divide the change in output by the change in number of hours worked
c. divide the number of hours worked by output
d. divide output by the number of hours worked
ANSWER: d. divide output by the number of hours worked
34
. Robin lives on a deserted island. If she spends 8 hours fishing, she catches 24
fish. Her productivity of fishing is
a. 192 fish.
b. 1/3 hour per fish.
c. 3 fish per hour.
d. The answer cannot be computed using the information provided.
ANSWER: c. 3 fish per hour.
35
. Which of the following is not correct?
a. A country’s standard of living and its productivity are closely related.
b. Productivity refers to output produced per hour of work.
c. Increases in productivity can be used to increase output or leisure.
d. Countries that have had higher output growth per person have typically not
experienced higher productivity growth.
ANSWER: d. Countries that have had higher output growth per person have
typically not experienced higher productivity growth.
36
. Both Tom and Jerry work eight hours a day. Tom can produce six baskets of
goods per hour while Jerry can produce just four baskets of the same goods
per hour. It follows that Tom’s
a. productivity is greater than Jerry’s.
b. output is greater than Jerry’s.
c. standard of living is higher than Jerry’s.
37
. Which of the following is a determinant of productivity?
a. human capital
b. physical capital
c. natural resources
38
. The inputs used to produce goods and services are called
a. the production function.
b. the consumption function.
c. the factors of production.
ANSWER: c. the factors of production.
39
. The equipment and structures that are available to produce goods and services
are called
a. the production function.
b. technology.
c. physical capital.
d. human capital.
ANSWER: c. physical capital
40
. The saws, lathes, and drill presses that woodworkers use to produce goods and
services are
a. physical capital.
b. human capital.
c. natural resources.
d. technological knowledge.
ANSWER: a. physical capital.
41
. Which of the following would not be considered physical capital?
a. a new factory
b. a new computer used in a restaurant
c. a desk used in an accountant's office
d. on-the-job training
ANSWER: d. on-the-job training
42
. Which of the following would be considered physical capital?
a. the copy machines in a copy shop
b. the produce used to make salads at a restaurant
c. the skills and knowledge of a stock broker
ANSWER: a. the copy machines in a copy shop
43
. Human capital is
a. the stock of equipment and structures that is used to produce goods and
services.
b. the knowledge and skills that workers acquire through education, training,
and experience.
c. land, rivers, and mineral deposits.
d. technological knowledge.
ANSWER: b. the knowledge and skills that workers acquire through education,
training, and experience.
43
~ANSWER:
b. the knowledge and skills that workers acquire through education, training, and experience.
3
ANSWER:
4
ANSWER:
c. 35 years.
5
~ANSWER:
b. 2 percent per year, which implies a doubling about every 35 years.
6
ANSWER:
b. 8
7
~ANSWER:
~ANSWER:
a. 10 years.
9
ANSWER:

44
. Which of the following is considered human capital?
a. knowledge acquired from early childhood programs
b. knowledge acquired from grade school
c. knowledge acquired from on-the-job training
c. South Korea
10
~ANSWER:
a. Ethiopia.
11
ANSWER:
d. Productivity is not closely linked to government policies.
12
ANSWER:
a. total real output
13
ANSWER:
b. productivity.
14
ANSWER:
a. productivity.
15
ANSWER:
a. Both levels and growth rates of real GDP per person are diverse across countries.
16
~ANSWER:
b. 1/2
17
~ANSWER:
a. 1870.
45
. Human capital is a produced factor of production. Producing human capital
requires inputs in the form of
a. teachers.
b. libraries.
c. on-the-job-training.
18
ANSWER:
a. Brazil
19
~ANSWER:
c. 3.0 percent.
20
~ANSWER:
b. The ranking of countries by income changes substantially over time.
21
~ANSWER:
22
ANSWER:
a. Bangladesh
23
~ANSWER:
b. the United Kingdom.
46
. Which of the following is human capital?
a. breakfasts served in a company’s cafeteria
b. the exercise equipment in a company’s gym
c. understanding how to use a company’s accounting software
ANSWER: c. understanding how to use a company’s accounting software
24
~ANSWER:
c. about 9 percent
TYPE: M DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
25
~ANSWER:
c. the accumulation of a growth rate over a period of time.
26
~ANSWER:
d. 17.5 years
27
~ANSWER:
b. 7 years
28
~ANSWER:
b. 100 years for their output to double, but only take about 23 years to double if their growth rate was 3
percent.
47
. Which of the following is considered human capital?
a. the education you are pursuing
b. your comfortable office chair
c. the wrist rest for your computer
ANSWER: a. the education you are pursuing
29
~ANSWER:
c. 12 years
30
~ANSWER:
b. every 7 years
31
~ANSWER:
b. 70/x years.
32
ANSWER:
d. explains most of the differences across countries in the standard of living.
33
~ANSWER:
d. divide output by the number of hours worked
34
~ANSWER:
48
. Which of the following is a part of your Economics professor’s human
capital?
a. her copy of Mankiw’s text
b. her chalk holder
c. the degree she earned from some prestigious university
ANSWER: c. the degree she earned from some prestigious university
c. 3 fish per hour.

35
~ANSWER:
d. Countries that have had higher output growth per person have typically not experienced higher
productivity growth.
36
~ANSWER:
37
~ANSWER:
38
~ANSWER:
c. the factors of production.
39
49
. Natural resources
a. are inputs provided by nature.
b. are inputs such as land, rivers, and mineral deposits.
c. take two forms: renewable and nonrenewable.
~ANSWER:
c. physical capital
40
~ANSWER:
a. physical capital.
41
~ANSWER:
d. on-the-job training
42
~ANSWER:
a. the copy machines in a copy shop
44
~ANSWER:
45
50
. Which of the following is an example of a nonrenewable resource?
a. oil
b. lumber
c. livestock
ANSWER: a. oil
~ANSWER:
46
~ANSWER:
c. understanding how to use a company’s accounting software
47
~ANSWER:
a. the education you are pursuing
48
~ANSWER:
c. the degree she earned from some prestigious university
49
~ANSWER:
50
51
. Natural resources are
a. produced factors of production.
b. included as part of physical capital.
c. the nonrenewable resources that are gone once used.
d. the renewable and nonrenewable inputs of production provided by nature.
ANSWER: d. the renewable and nonrenewable inputs of production provided by
nature.
52
. In a market economy, scarcity of resources is reflected in
a. supply.
b. demand.
c. the stock of the resource.
d. market prices.
ANSWER: d. market prices.
~ANSWER:
a. oil
51
~ANSWER:
d. the renewable and non-renewable inputs of production provided by nature.
52
~ANSWER:
d. market prices.
53
. In a market economy, the real, or inflation adjusted, price of a resource
measures its
a. contribution to revenue.
b. relative scarcity.
c. relative importance.
d. contribution to efficiency.
ANSWER: b. relative scarcity.
54
. The market prices of most natural resources (adjusted for inflation) have been
a. rising.
b. stable or rising.
c. stable or falling.
d. falling.
ANSWER: c. stable or falling.
53
~ANSWER:
b. relative scarcity.
54
~ANSWER:
c. stable or falling.
55
. Market prices show that natural resources
a. are a limit to economic growth.
b. are unrelated to economic growth.
c. are not a limit to economic growth.
d. are limiting productivity because of increased scarcity.
ANSWER: c. are not a limit to economic growth.
56
a. There are no renewable natural resources.
b. Technology requires greater use of natural resources.
c. Human capital is equivalent to technology.
d. The relative prices of most natural resources are stable or falling.
ANSWER: d. The relative prices of most natural resources are stable or falling.
55
~ANSWER:
c. are not a limit to economic growth.
56
~ANSWER:
d. The relative prices of most natural resources are stable or falling.
57
. Technological knowledge refers to
a. the knowledge and skills that workers acquire through education, training,
and experience.
b. the stock of equipment and structures that are used to produce goods and
services.
c. the understanding of the best ways to produce goods and services.
ANSWER: c. the understanding of the best ways to produce goods and services.
58
. Proprietary technology is knowledge that is
a. obsolete.
b. known by everyone.
c. known by all in the profession.
d. known only by the company that discovers it.
ANSWER: d. known only by the company that discovers it.
57
~ANSWER:
c. the understanding of the best ways to produce goods and services.
58
~ANSWER:
d. known only by the company that discovers it.
59
. Your instructor discovers a way to teach you economics more efficiently. He
publishes his findings in a journal. His findings
a. are not included in technological knowledge.
b. become common knowledge.
c. become proprietary knowledge.
ANSWER: b. become common knowledge.
60
. Your company discovers a better way to produce mousetraps, but your better
methods are not apparent from the mousetraps themselves. Your knowledge of
how to more efficiently produce mousetraps is
a. proprietary technological knowledge.
b. proprietary, but not technological knowledge.
c. common technological knowledge.
d. common, but not technological knowledge.
ANSWER: a. proprietary technological knowledge.
59
~ANSWER:
b. become common knowledge.
60
~ANSWER:
a. proprietary technological knowledge.
61
. Technological knowledge refers to
a. the amount of time the population has devoted to reading society's
textbooks.
b. available information on how to produce things.
c. resources expended transmitting society's understanding to the labor force.
d. All of the above are technological knowledge.
ANSWER: b. available information on how to produce things.
62
. Although technological knowledge and human capital are closely related,
there is an important difference. A relevant metaphor would be
a. technological knowledge is the quality of society's textbooks, whereas
human capital is the amount of time that the population has devoted to
reading them.
b. technological knowledge is the textbook, whereas human capital is the ink.
c. technological knowledge is the thought process, whereas human capital is
the calorie burn.
d. None of the above are relevant.
ANSWER: a. technological knowledge is the quality of society's textbooks,
whereas human capital is the amount of time that the population has devoted
to reading them.
61
~ANSWER:
b. available information on how to produce things.
TYPE: Ml KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
62
~ANSWER:
a. technological knowledge is the quality of society's textbooks, whereas human capital is the amount of
time that the population has devoted to reading them.
63
. The relationship between the quantity of output created and the quantity of
inputs needed to create it is called
a. the capital accumulation function.
b. the production function.
c. technological knowledge.
d. human capital.
ANSWER: b. the production function.
64
. If your firm has constant returns to scale, then if you doubled all your inputs
your firm’s output would
a. not change.
b. increase, but by less than double.
c. double.
d. more than double.
ANSWER: c. double.
63
~ANSWER:
b. the production function.
64
~ANSWER:
c. double.
65
. You bake cookies. One day you double the time you spend, double the number
of chocolate chips, flour, eggs, and all your other inputs, and bake twice as
many cookies. Your cookie production function
a. has decreasing returns to scale.
b. has zero returns to scale.
c. has constant returns to scale.
d. has increasing returns to scale.
ANSWER: c. has constant returns to scale.
66
. If there are constant returns to scale, the production function can be written as
a. xY = 2xAF(L, K, H, N).
b. Y/L = A F(xL, xK, xH, xN).
c. Y/L = A F( 1, K/L, H/L, N/L).
d. L = AF(Y, K, H, N).
ANSWER: c. Y/L = A F( 1, K/L, H/L, N/L)
65
~ANSWER:
c. has constant returns to scale.
66
~ANSWER:
c. Y/L = A F( 1, K/L, H/L, N/L)
67
. Using the production function and notation employed by Mankiw, K/L
measures
a. output per worker.
b. natural resources per worker.
c. technological knowledge per worker.
d. physical capital per worker.
ANSWER: d. physical capital per worker.
68
. The constant returns production function given in the text is xY = A F(xL, xK,
xH, xN). If we let x = 1/L, then the equation becomes Y/L = A F(1, K/L, H/L,
N/L) where Y is the quantity of output, A is the level of available production
technology, L is the quantity of labor, H is the quantity of human capital, and
N is the quantity of natural resources. The equation Y/L = A F(1, K/L, H/L,
N/L) provides a
a. measure of gross domestic product.
b. summary for the four determinants of productivity.
c. foundation for measuring inflation.
d. measure of the availability of natural resources.
ANSWER: b. a summary for the four determinants of productivity.
69
. Which of the following would increase productivity?
a. an increase in the physical capital stock per worker
b. an increase in human capital per worker
c. an increase in natural resources per worker
67
~ANSWER:
d. physical capital per worker.
68
~ANSWER:
b. a summary for the four determinants of productivity.

70
. One of the Ten Principles of Economics in Chapter 1 is that people face
tradeoffs. The growth that arises from capital accumulation is not a free lunch:
It requires that society
a. conserve resources for future generations.
b. recycle resources so that future generations can produce goods and
services with the accumulated capital.
c. sacrifice consumption goods and services now in order to enjoy more
consumption in the future.
ANSWER: c. sacrifice consumption goods and services now in order to enjoy
more consumption in the future.
71
. Capital accumulation
a. requires that society sacrifice consumption goods in the present.
b. allows society to consume more in the present.
c. decreases saving rates.
d. has no tradeoffs.
ANSWER: a. requires that society sacrifice consumption goods in the present.
70
~ANSWER:
c. sacrifice consumption goods and services now in order to enjoy more consumption in the future.
71
~ANSWER:
a. requires that society sacrifice consumption goods in the present.
69
~ANSWER:
72
. One way that government can encourage growth and, in the long run, raise the
economy's standard of living is by encouraging
a. population growth.
b. saving and investment.
c. consumption.
d. spending.
ANSWER: b. saving and investment
73
. Across countries, investment and growth rates are
a. unrelated.
b. positively related.
c. negatively related.
d. positively related for rich countries, but negatively related for poor
countries.
ANSWER: b. positively related.
72
~ANSWER:
b. saving and investment
73
~ANSWER:
b. positively related.
74
. The traditional view of the production process is that capital is subject to
a. increasing returns.
b. diminishing returns.
c. constant returns.
d. diminishing returns for low levels of capital, and increasing returns for
high levels of capital.
ANSWER: b. diminishing returns.
75
. If there are diminishing returns to capital,
a. increases in the capital stock eventually decrease output.
b. increases in the capital stock increase output by ever smaller amounts.
c. capital produces fewer goods as it ages.
d. new ideas are not as useful as old ideas.
ANSWER: b. increases in the capital stock increase output by ever smaller
amounts.
74
~ANSWER:
b. diminishing returns.
75
~ANSWER:
b. increases in the capital stock increase output by ever smaller amounts.
76
. In the long run, a higher saving rate
a. cannot increase the capital stock.
b. increases productivity.
c. means that people must consume less in the future.
ANSWER: b. increases productivity.
77
. In the long run, a higher saving rate increases the
a. level of income.
b. growth rate of output.
c. growth rate of productivity.
ANSWER: a. level of income.
76
~ANSWER:
b. increases productivity.
77
~ANSWER:
a. level of income.
78
. According to studies of international data on economic growth, increasing the
saving rate
a. increases the need for capital.
b. reduces the need for capital.
c. leads to somewhat higher GDP growth for a few years.
d. can lead to substantially higher GDP growth for a period of several
decades.
ANSWER: d. can lead to substantially higher GDP growth for a period of several
decades.
79
. Other things equal, relatively poor countries tend to
a. grow slower than relatively rich countries; this is called the fall-behind
effect.
b. grow slower than relatively rich countries; this is called the Malthus effect.
c. grow faster than relatively rich countries; this is called the catch-up effect.
d. grow faster than relatively rich countries; this is called the constant-
returns-to-scale effect.
ANSWER: c. grow faster than relatively rich countries, this is called the catch-up
effect.
78
~ANSWER:
d. can lead to substantially higher GDP growth for a period of several decades.
79
~ANSWER:
c. grow faster than relatively rich countries, this is called the catch-up effect.
80
. The catch-up effect refers to the idea that
a. rich countries aid relatively poor countries so as to "catch them up."
b. savings will always "catch-up" with investment spending.
c. it is easier for a country to grow fast if it starts out relatively poor.
d. if investment spending is low, increased saving will help investment to
"catch-up."
ANSWER: c. it is easier for a country to grow fast if it starts out relatively poor.
81
. The logic behind the catch-up effect is that
a. workers in countries with low income will work harder than workers in
countries with high incomes.
b. the capital stock in rich countries deteriorates more rapidly than the capital
stock in poor countries.
c. new capital adds more to production in a country that doesn’t have much
capital than in a country that already has much capital.
ANSWER: c. new capital adds more to production in a country that doesn’t have
much capital than in a country that already has much capital.
80
~ANSWER:
c. it is easier for a country to grow fast if it starts out relatively poor.
81
~ANSWER:
c. new capital adds more to production in a country that doesn’t have much capital than in a country that
already has much capital.
82
. In the second half of the twentieth century, which of the following nations
benefited a lot from the catch-up effect?
a. Ethiopia
b. Germany
c. South Korea
d. the United States
ANSWER: c. South Korea
83
. Which of the following is consistent with the catch-up effect?
a. The United States had a higher growth rate before 1900 than after.
b. After World War II the United States had lower growth rates than war-
ravaged European countries.
c. Although the United States has a relatively high level of output per person,
its growth rate is rather modest compared to some countries.
82
~ANSWER:
c. South Korea
83
~ANSWER:
84
. If your American-based firm opens and operates a new plastics factory in
Ireland, your firm is engaging in
a. foreign portfolio investment.
b. foreign financial investment.
c. indirect foreign investment.
d. foreign direct investment.
ANSWER: d. foreign direct investment.
85
. In the 1800s, Europeans purchased stock in American companies that used the
funds to build railroads and factories. The Europeans made
a. foreign direct investments.
b. foreign indirect investments.
c. foreign portfolio investments.
d. indirect domestic investments.
ANSWER: c. foreign portfolio investment.
84
~ANSWER:
d. foreign direct investment.
85
~ANSWER:
c. foreign portfolio investment.
86
. Foreign saving is used for domestic investment when foreigners engage in
a. foreign direct investment.
b. foreign investment.
c. either a or b.
d. neither a nor b.
ANSWER: c. either a or b.
87
. Suppose Ford builds a new car factory in Mexico. Future production from
such an investment would
a. increase Mexico's GNP more than it would increase Mexico's GDP.
b. increase Mexico's GDP more than it would increase Mexico's GNP.
c. not affect Mexico's GNP, but increase Mexico's GDP.
d. have no affect on either GDP or GNP.
ANSWER: b. increase Mexico's GDP more than it would increase Mexico's GNP.
86
~ANSWER:
c. Either a or b.
87
~ANSWER:
b. increase Mexico's GDP more than it would increase Mexico's GNP.
88
. The opening of a new American-owned factory in Liberia would tend to
increase Liberia’s GDP more than it increases Liberia’s GNP because
a. some of the income from the factory accrues to people who do not live in
Liberia.
b. gross domestic product is income earned within a country by both
residents and nonresidents, whereas gross national product is the income
earned by residents of a country while producing both at home and abroad.
c. all of the income from the factory is included in Liberia’s GDP.
89
. If Japanese-owned Honda opens a factory in Ohio,
a. U.S. GNP rises more than U.S. GDP.
b. Japanese GDP rises more than Japanese GNP.
c. Both of the above are correct.
ANSWER: d. None of the above are correct.
88
~ANSWER:
89
~ANSWER:
90
. Investment from abroad
a. is a way for poor countries to learn the state-of-the-art technologies
developed and used in richer countries.
b. is encouraged by economists.
c. often requires removing restrictions that governments have imposed on
foreign ownership of domestic capital.
91
. An organization that tries to encourage the flow of investment to poor
countries is the
a. World Bank.
b. Organization of Less Developed Countries.
c. Alliance of Developing Countries.
d. International Development Alliance.
ANSWER: a. World Bank.
90
~ANSWER:
91
~ANSWER:
a. World Bank.
92
. On average, each year of schooling raises a person's wage by about
a. 1 percent.
b. 5 percent.
c. 10 percent.
d. 15 percent.
ANSWER: c. 10 percent.
93
. Which of the following is generally an opportunity cost of investment in
human capital?
a. increased earning potential
b. future job security
c. forgone wages at present
ANSWER: c. forgone wages at present
92
~ANSWER:
c. 10 percent.
93
~ANSWER:
c. forgone wages at present
94
. An educated person might generate ideas to increase production. These ideas
a. produce external benefits.
b. produce a return to society from education that is greater than the return to
the individual.
c. could justify government subsides for education.
95
. The term "brain drain" refers to
a. the emigration of many of the most highly educated workers from poor to
rich countries.
b. the loss of knowledge due to a poor educational system in a country.
c. a situation where the population grows faster than the level of education.
d. a situation where one country robs technological knowledge from another
country.
ANSWER: a. the emigration of many of the most highly educated workers from
poor to rich countries.
94
~ANSWER:
95
~ANSWER:
a. the emigration of many of the most highly educated workers from poor to rich countries.
96
. Property rights refer to
a. the ability of people to exercise authority over the resources they own.
b. the ability of government to exercise authority over property owners.
c. a document stating the rights of ownership that accompany owning
property.
ANSWER: a. the ability of people to exercise authority over the resources they
own.
97
. Generally, the main cause of famine is
a. excessive population.
b. an inadequate distribution of food.
c. a shortage of food.
d. All of the above are generally the causes of famine.
ANSWER: b. an inadequate distribution of food.
96
~ANSWER:
a. the ability of people to exercise authority over the resources they own.
97
~ANSWER:
b. an inadequate distribution of food.
98
. Inward-oriented policies
a. have generally increased productivity and growth in the countries that
pursued them.
b. include imposing tariffs and other trade restrictions.
c. promote production of goods and services within a country that they can
produce most efficiently.
ANSWER: b. include imposing tariffs and other trade restrictions.
99
. Inward-oriented policies
a. primarily concern the development of human capital.
b. in some ways are like prohibiting the use of certain technologies.
c. are generally supported by economists.
ANSWER: b. in some ways are like prohibiting the use of certain technologies.
98
~ANSWER:
b. include imposing tariffs and other trade restrictions.
99
~ANSWER:
b. in some ways are like prohibiting the use of certain technologies.
100
. Outward-oriented policies
a. prevent countries from taking advantage of gains from trade.
b. have led to high growth for the countries that pursued them.
c. receive little support from economists, despite such policies’ success.
ANSWER: b. have led to high growth for the countries that pursued them.
101
. When a country removes trade barriers and exports pork chops and imports
stereos,
a. it is essentially transforming pork chops into stereos.
b. its productivity decreases.
c. its growth slows.
d. its economic well-being decreases while that of the country that sells
stereos increases.
ANSWER: a. it is essentially transforming pork chops into stereos.
102
. Which of the following would not be a good measure of economic well-being,
particularly the standard of living?
a. productivity
b. GDP per person
c. GDP
d. All of the above are good measures of the standard of living.
ANSWER: c. GDP
100
~ANSWER:
b. have led to high growth for the countries that pursued them.
101
ANSWER:
a. it is essentially transforming pork chops into stereos.
102
~ANSWER:
c. GDP

103
. Real GDP per person
a. is found as population divided by GDP.
b. provides for more meaningful comparisons across time and countries than
real GDP.
c. minus real GDP per person from the previous period equals the growth
rate.
ANSWER: b. provides for more meaningful comparisons across time and countries
than real GDP.
104
. All else equal, which of the following would tend to cause GDP per person to
rise?
a. high population growth
b. investment in human capital
c. rapid growth in the number of workers
ANSWER: b. investment in human capital
105
. A rapid increase in the number of workers is likely to
a. raise both real GDP and real GDP per person.
b. raise real GDP, but decrease real GDP per person.
c. raise real GDP per person, but decrease real GDP.
d. decrease both real GDP and real GDP per person.
ANSWER: b. raise real GDP, but decrease real GDP per person.
103
~ANSWER:
b. provides for more meaningful comparisons across time and countries than real GDP.
104
~ANSWER:
b. investment in human capital

106
. Which of the following is not correct?
a. Educational attainment tends to be lowest in countries with the highest
population growth.
b. Economists generally believe that decreasing population growth rates can
increase output growth rates.
c. China allows only one child per family and couples that violate this rule
are subject to substantial fines.
d. In developed countries, population growth is 3 percent; in many
developing countries it is 5 percent.
ANSWER: d. in developed countries, population growth is 3 percent; in many
developing countries it is 5 percent.
107
. The primary reason that U.S. living standards are higher today than they were
a century ago is that
a. human capital has increased.
b. technological knowledge has increased.
c. physical capital per worker has increased.
d. more productive natural resources have been discovered.
ANSWER: b. technological knowledge has increased.
108
. Once one person discovers an idea, the idea generally enters society's pool of
knowledge, which many other people can use. Therefore, knowledge is
generally a
a. private good.
b. public good.
c. normal good.
d. societal good.
ANSWER: b. public good.
109
. Most technological progress comes from
a. private research by firms.
b. individual inventors.
c. government research.
d. Both a and b are correct.
ANSWER: d. Both a and b are correct.
110
. National defense and knowledge are considered
a. private goods.
b. public goods.
c. normal goods.
d. inappropriate for the government to provide.
ANSWER: b. public goods.
111
. Patents turn new ideas into
a. private goods, and increase the incentive to engage in research.
b. private goods, but decrease the incentive to engage in research.
c. public goods, and increase the incentive to engage in research.
d. public goods, and decrease the incentive to engage in research.
ANSWER: a. private goods, and increase the incentive to engage in research.
112
. Other things the same, a country is likely to have a lower growth rate than
other countries if it
a. has a small population.
b. pursues inward-looking policies.
c. encourages foreign investment.
d. protects property rights.
ANSWER: b. pursues inward-looking policies.
113
. From 1959 to 1973, productivity, as measured by output per worker hour
worked in U.S. businesses, grew at a rate of
a. 4.0 percent.
b. 3.2 percent.
c. 2.5 percent.
d. 1.8 percent.
ANSWER: b. 3.2 percent.
114
. From 1973 to 1994, U.S. productivity grew by
a. 3.2 percent.
b. 2.5 percent.
c. 2.0 percent.
d. 1.3 percent.
ANSWER: d. 1.3 percent.
115
. From 1973 to 1998, U.S. productivity growth was slower than from 1959 to
1973. Which of the following is correct?
a. Most other developed countries did not experience similar slow downs.
b. The slowdown is primarily due to reduced growth in human capital.
c. The slowdown is primarily due to reduced growth in physical capital.
ANSWER: d. None of the above are correct.
116
. From 1973 to 1998, U.S. productivity growth was slower than from 1959 to
1973. Which of the following is correct?
a. It appears that this may be attributed to a slowdown in technological
progress.
b. This continues a downward trend as output growth was higher in periods
prior to 1959 to 1973.
c. This slowdown is unique to the United States.
ANSWER: a. It appears that this may be attributed to a slowdown in technological
progress.
117
. Typically, countries in Africa
a. had low but positive growth of real GDP per person between 1978 and
1994.
b. have laws and geography that encourage trade.
c. have high tax rates.
ANSWER: c. have high tax rates.
118
. While Africa should have grown faster than other developing areas because of
relatively low income per capita, Africa has grown more slowly. This can be
explained in part by
a. high trade barriers.
b. low tax rates.
c. excessive saving rates.
ANSWER: a. high trade barriers.
119
. Which of the following have been suggested as remedies for low growth in
many African countries?
a. reduced corporate taxes
b. cutting import tariffs and ending export taxes on agricultural products
c. focus government spending on basic public health, education, and internal
order
120
. 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. impose trade restrictions to protect the interests of domestic producers and
consumers.
b. subsidize key industries.
c. lend support to the invisible hand by maintaining property rights and
political stability.
d. limit foreign investment.
ANSWER: c. lend support to the invisible hand by maintaining property rights and
political stability.
TRUE/FALSE
121
. The average person in a rich country, such as Germany, has income about five
times that of an average person in a poor country such as Nigeria.
ANSWER: F
TYPE:T KEY1: D OBJECTIVE: 1 RANDOM: Y
122
. People in richer countries tend to have more material goods, better nutrition,
safer housing, better healthcare, and longer life expectancy than do people in
poorer countries.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
123
. In the United States over the past century, real GDP per person has grown by
about 2 percent per year.
ANSWER: T
124
. In the United States, average income today is about four times as high as
average income a century ago.
ANSWER: F
125
. In Hong Kong, Singapore, South Korea, and Taiwan, average income has
risen about 7 percent per year in recent decades.
ANSWER: T
126
. Some African countries, such as Chad, Ethiopia, and Nigeria, have had
stagnant income per person for many years.
ANSWER: T
127
. GDP measures both income and output.
ANSWER: T
128
. The growth of real GDP is a good gauge of economic prosperity, and the level
of real GDP is a good gauge of economic progress.
ANSWER: F
129
. Mary produces 40 goods in 8 hours, so her productivity is 320 goods.
ANSWER: F
130
. Both real GDP per person and growth in real GDP per person vary widely
from country to country.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
131
. If a relatively poor country had grown at 3.5 percent per year for the last 100
years, it would be a relatively rich country today.
ANSWER: T
132
. Differences in growth rates have changed the ranking of countries by income
substantially over time.
ANSWER: T
133
. Over the last 100 years Japan had a higher average growth rate per year and so
now has more real GDP per person than the United States.
ANSWER: F
134
. In 1870, the United Kingdom was the richest nation in the world, but now has
average income well below that of the United States and Canada.
ANSWER: T
135
. International data on the history of real GDP growth rates shows that indeed
the rich countries get richer and the poor countries get poorer.
ANSWER: F
136
. According to the rule of 70, if a variable grows at the rate of x percent per
year, then that variable doubles in approximately 70(1 - x)/x years.
ANSWER: F
137
. 100 years ago Walter put money into a savings account at 3.5 percent. It
follows that his account balance has doubled only 2 times.
ANSWER: F
138
. If U.S. income grows at the rate of 2 percent per year, and Japanese income
grows at the rate of 3 percent per year, it will take about 35 years for U.S.
income to double, but only about 23 years for Japanese income to double.
ANSWER: T
139
. Over the last 100 years Japan had a growth rate of about 3 percent; this means
that their real GDP per person is more than 16 times its value 100 years ago.
ANSWER: T
TYPE: T DIFFICULTY: 3 KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM:
Y
140
. The large variation in living standards around the world can be attributed to
differences in productivity.
ANSWER: T
141
. Productivity is hours worked divided by output produced.
ANSWER: F
142
. Americans have a higher standard of living than Indonesians because
American workers are more productive than Indonesian workers.
ANSWER: T
143
. Determinants of productivity include physical capita per worker, human
capital per worker, natural resources per worker, and technological
knowledge.
ANSWER: T
144
. An important feature of capital is that it is a produced factor of production.
ANSWER: T
145
. Physical capital makes workers more productive.
ANSWER: T
146
. Flour, sugar, and eggs would be part of a bakery’s physical capital.
ANSWER: F
147
. Physical capital is the economist's term for the knowledge and skills that
workers acquire through education, training, and experience.
ANSWER: F
148
. Improvements in a country’s educational system eventually lead to an increase
in that country’s human capital.
ANSWER: T
149
. Human capital is a nonproduced factor of production.
ANSWER: F
150
. Students can be viewed as workers helping to produce human capital.
ANSWER: T
151
. Natural resources are produced inputs.
ANSWER: F
152
. Oil is a nonrenewable natural resource.
ANSWER: T
153
. Kuwait and Saudi Arabia are rich largely because of their natural resources.
ANSWER: T
154
. Changes in the market prices of most resources indicate that they are
becoming increasingly scarce.
ANSWER: F
155
. Technological progress often yields ways to avoid the natural resource limits
to growth.
ANSWER: T
156
. Technological knowledge is the understanding of the best ways to produce
goods and services.
ANSWER: T
157
. Technological knowledge may be either proprietary or common.
ANSWER: T
158
. Human capital is not the same as technological knowledge.
ANSWER: T
159
. A production function describes the relationship between the quantity of
inputs used in production and the quantity of output from production.
ANSWER: T

160
. If a production function has constant returns to scale, then simply by doubling
labor, output will double.
ANSWER: F
161
. A production function with constant returns to scale can be used to show that
output per worker depends on inputs per worker.
ANSWER: T
162
. An economy can increase its rate of economic growth by reducing current
consumption to increase its rate of domestic capital investment.
ANSWER: T
163
. Countries that devote a large share of GDP to investment tend to have high
growth rates.
ANSWER: T
164
. The government cannot change the savings rate.
ANSWER: F
165
. If average income in the United States is 15 times the average income in
Mexico, an increase in capital investment of $500 per worker will likely
increase productivity more in Mexico than in the United States.
ANSWER: T
166
. When diminishing returns has set in, adding more capital will decrease GDP
per person.
ANSWER: F
167
. The catch-up effect suggests that, other things equal, poor countries grow
more rapidly than rich countries.
ANSWER: T
168
. The catch-up effect is a result of diminishing returns to capital.
ANSWER: T
169
. Other things the same, a country with low income per person can have a
higher growth rate than a country with a high income per person even if the
countries have identical saving rates.
ANSWER: T
170
. With approximately the same share of GDP devoted to capital investment, the
United States grew more rapidly than South Korea did during the past few
decades.
ANSWER: F
171
. In the long run, a higher saving rate leads to higher growth rates of both
productivity and income.
ANSWER: F
172
. It may take decades for a poor country to catch up with a rich one.
ANSWER: T
173
. Studies of international data show that when other variables that affect
productivity are controlled for, the catch-up effect is confirmed.
ANSWER: T
174
. If U.S. citizens open a factory in Singapore, Singapore's GDP will increase by
more than Singapore's GNP.
ANSWER: T
175
. The only way a country can increase its rate of growth is by sacrificing current
consumption.
ANSWER: F
176
. Foreign investment increases an economy’s capital stock and wages.
ANSWER: T
177
. When Elmo, a U.S. citizen, buys stock in a toy company in Uruguay, he is
engaging in foreign portfolio investment.
ANSWER: T
178
. When Catherine, a U.S. citizen, opens a dental floss factory in Haiti, she is
engaging in foreign direct investment.
ANSWER: T
179
. The World Bank obtains funds from the world's advanced countries and uses
these resources to make loans to developing countries for investment in new
capital.
ANSWER: T
180
. In the United States, each year of schooling raises a person's wage on average
by about 10 percent.
ANSWER: T
181
. Education increases the stock of human capital and so increases the standard
of living.
ANSWER: T
182
. Some economists argue that the government should subsidize education
because human capital generates positive externalities.
ANSWER: T
183
. The “brain drain” of highly educated workers from poor nations to rich nations
benefits the workers who move without hurting the standard of living of those
who stay behind.
ANSWER: F
184
. Other things equal, a country with a legal and political structure that defines
and enforces property rights is likely to have a greater degree of economic
prosperity than one without such a structure.
ANSWER: T
185
. Countries that lack property rights and political stability have lower
investment, and so lower growth rates.
ANSWER: T
186
. Recent famines have primarily resulted from rapid population growth.
ANSWER: F
187
. Poor countries can increase their rates of economic growth by pursuing
outward-oriented policies.
ANSWER: T
188
. Countries that pursue outward-oriented policies increase their rates of growth,
but do so at the expense of the growth rate of countries with which they trade.
ANSWER: F
189
. Countries with high rates of population growth tend to have low growth rates
of average income.
ANSWER: T
190
. Equal treatment of women is one way for less developed countries to reduce
the rate of population growth.
ANSWER: T
191
. Educational attainment tends to be low in countries with high population
growth.
ANSWER: T
192
. Knowledge is frequently a public good.
ANSWER: T

193
. The U.S. government has played a large role in encouraging research and
development.
ANSWER: T
194
. If the rate of growth of productivity in the United States had not fallen after
1973, the real income of the average American would be 15 percent higher
today.
ANSWER: F
195
. The slowdown in productivity growth since the mid-1970s occurred in other
developed countries, not just the United States.
ANSWER: T
196
. Many economists blame a slowdown in labor force growth for the reduction in
the rate of growth of productivity since the mid-1970s.
ANSWER: F
197
. As of 1998, the effects of computers on the economy had been insufficient to
reverse the productivity slowdown.
ANSWER: T
198
. Compared to the 1959 to 1973 period, real GDP growth in the United States
from 1973 to 1998 was low. However, compared to other periods in the last
125 years, both of these periods were ones of high growth.
ANSWER: T
199
. Economists believe that, at the very least, the government can encourage
economic growth by maintaining property rights and political stability.
ANSWER: T
200
. Economists disagree about whether the government can encourage economic
growth by subsidizing specific industries that might be important for
technological progress.
ANSWER: T
SHORT ANSWER:
201
. Large differences in income are reflected in large differences in the quality of
life. What are some other variables that measure quality of life more directly
and tend to be greater in rich countries than in poor ones?
ANSWER: Richer countries have more automobiles, televisions, and telephones
per person. They also tend to have better nutrition, safer housing, better health
care, and longer life expectancy.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
202
. Compare the average income (real GDP per capita) of the United States to
developing countries such as China and Bangladesh
ANSWER: The average income (real GDP per capita) in the United States was
$28,740 in 1997, approximately 8 times as high as in China ($3,570 in 1997),
and more than 25 times as high as in Bangladesh($1,050 in 1997).
203
. Compute real GDP per person for each of the countries below. Comment on
why real GDP per person is more informative than real GDP alone.
Country Population Real GDP
Switzerland 7million 284,119 million
Canada 30 million 580,872 million
Mexico 96 million 386,059 million
ANSWER: Real GDP per person is computed as real GDP divided by population.
For Switzerland it is 284,119/7 = $40,588. For Canada it is 580,872/30 =
$19,364. For Mexico it is 368,059/96 = $4,021.
Countries that have larger populations tend to have more workers and so more real
GDP. Comparing, the real GDP numbers themselves is misleading. Mexico’s
real GDP is about 40 percent more than Switzerland’s, but Mexico’s per
person real GDP is about one-tenth that of Switzerland.
204
. The level of U.S. nominal GDP in 1997 was about 19 times what it was in
1957. Yet it is clear that the typical person living in 1997 did not have 19
times as much stuff as a person living in 1957. How can these two facts be
reconciled?
ANSWER: Nominal GDP has increased partly because prices increased. The
dollars that people earned in 1997 did not buy as many goods as they did back
in 1957. The increase in nominal GDP also reflects a growing population and
so a growing number of workers. To compare how much a typical person had
in 1957 with how much a typical person had in 1997 we need to have numbers
on real GDP per person.
(Notes concerning some specific details not given in the text: From 1957 to
1997 real GDP person more or less doubled. Population in 1997 was about 1.6
times population in 1957, and prices in 1997 were about 5 times those in
1957.)
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM:
205
. Compare the U.S. growth rate of average income per person to that of a couple
of other countries.
ANSWER: Real per capita GDP grew at an average rate of 1.75 percent per year in
the United States between 1870 and 1997, at an average annual rate of 2.82
percent in Japan between 1890 and 1990, and at an average annual rate of 0.08
percent in Bangladesh between 1900 and 1987.
206
. Use the data below to find out the growth of income per person (over the
entire period, not an annual basis) between the two years listed.
Year Real GDP (1996 prices) Population
1989 6,600,000 million 247 million
1999 8,900,000 million 273 million
ANSWER: Income per person in 1989 was $6,600,000/247 = about $26,720.
Income per person in 1999 was $8,900,000/273 = about $32,600. Income per
person grew by (32,600 - 26,720)/26,720 = 22 percent.
207
. Using the “rule of 70,” calculate about how many years it would take for a
country's real per capita GDP to double if the growth rate is:
a. 1 percent
b. 2 percent
c. 3 percent
d. 7 percent
e. 10 percent
ANSWER: a. 70 years
b. 35 years
c. 23 1/3 years
d. 10 years
e. 7 years
TYPE: S KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
208
. Over the past century, U.S. real income per person has grown at an average
annual rate of about 1.75 percent per year. How many years does it take for
income to double if it continues to grow at this rate? Considering how many
years it takes for income to double and that current income per person is about
$28,750, what will U.S. income be 200 years from now if the economy
continues to grow at this rate?
ANSWER: To find how long it takes output to double we use the rule of 70. Since
70/1.75 = 40, it takes 40 years for output to double. If output doubles every 40
years, it will double 200/40 = 5 times in the next 200 years and so be $28,750
x 2 x 2 x 2 x 2 x 2 = $28,750 x 32 = $920,000.
209
. Over the past century Brazil had an average annual growth rate of 2.4 percent,
while the United States had an average annual growth rate of 1.75 percent.
Brazil’s real GDP per person in 1997 was about $6,250 while that of the
United States was about $28,750. About how many times as high as Brazil’s
real GDP per person was that of the United States? If these growth rates
continue for another 120 years, how will the answer to this question be
different? Show and explain your work. Hint: Use the “rule of 70”to find out
about how many times each country’s output doubles in 120 years.
ANSWER: U.S. income per person is $28,750/$6,250 = 4.6 times Brazilian
income per person. With a growth rate of 1.75, income doubles about every
70/1.75 = 40 years. So in 120 years U.S. income would double 120/40 = 3
times and so be $28,750 x 2 x 2 x 2 = $230,000. With a growth rate of 2.4,
income doubles about every 70/2.4 = 29 years. So, in 120 years Brazilian
income will have doubled 120/29 = about 4 times and so be about $6,250 x 2 x
2 x 2 x 2 = $100,000. Therefore, U.S. income would be $230,000/$100,000 =
2.3 times Brazilian income.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM:
Y
210
. Though we lack accurate statistics on real GDP per person from hundreds of
years ago, we know that consistent GDP growth above zero for any extended
time is a relatively recent historical event. To understand why, first compute
how many years it takes output to double if the growth rate is even just 1.4
percent. Your answer tells you how many years ago income was half of what
it would be today if the growth rate had been 1.4 percent. What fraction of
today’s income per person would output have been 500 years ago?
ANSWER: For each 70/1.4 = 50 years we go back output would be half of its
current level. If we go back 500 years ago, we would have to half output 10
times. Thus, output would only be 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2
x 1/2 x 1/2 = (1/2)10 = 1/1024. Even using the income of a rich country, this
would be less than $30 per person.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM:
Y
211
. In the simplest terms, explain what causes the tremendous variation in living
standards observed around the world.
ANSWER: In the simplest terms, the variation in living standards across nations is
a result of the variation in labor productivity across nations.
212
. Why is productivity related to the standard of living? In your answer be sure
to explain what productivity and standard of living mean.
ANSWER: 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.
213
. What are the factors that determine labor productivity?
ANSWER: 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.
214
. What is a production function? Write an equation for a typical production
function, and explain what each of the terms represents.
ANSWER: A production function is a mathematical representation of the
relationship between the quantity of inputs used in production and the quantity
of output from production. 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.
215
. What is meant by constant returns to scale?
ANSWER: When there is constant returns to scale, if all factors were x times as
high, output would be x times as high.
216
. List the determinants of productivity and then provide one example of each for
a furniture factory.
ANSWER: physical capital—lathes
human capital—the manager’s understanding of how the factory works
natural resources —wood
echnological knowledge—knowledge about the best way to make furniture
217
. Are natural resources necessary to ensure prosperity and growth of an
economy? Are natural resources sufficient to ensure prosperity and growth?
ANSWER: Natural resources are one of the factors of production. However, a
country need not have a lot of natural resources in order to be rich—consider
Japan and Switzerland. To a large extent, natural resources are what an
economy and its technology make of them. Some countries have abundant
natural resources and so are rich—consider the major oil producing countries.
However, natural resources are just one of several factors of production.
Obviously countries in the past had abundant natural resources and yet lacked
the physical capital, human capital, and technology to produce much with
them. Further, while abundant natural resources may make a country rich, a
given stock of natural resources does not create growth in income per person.
218
. What is the difference between human capital and technology?
ANSWER: 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 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 producing these goods by hand.
(Can someone help me set the clock on my VCR?)
219
. A farm family working for a year can now produce many, many times the
output of a farm family in the colonial United States. Explain why this means
that productivity has increased. What determinant of productivity is probably
most responsible for this increase? Defend your answer.
ANSWER: Productivity is the amount produced per hour of labor. If a farm family
can produce much more in a year, on average they produce much more in an
hour as well. Technology is likely responsible for most of the increase in
productivity. A farm family today clearly has more capital, but not enough to
explain such a large increase. A modern farm family’s understanding of
agriculture is better than their colonial counterparts, but not so much because
they had more education as because society’s understanding of how to
produce food has increased. It is difficult to imagine a very well-educated
farm family with considerable capital but restricted to using colonial
technology, producing more than a small fraction of what could be produced
by a farm family with modest modern education and capital taking advantage
of modern technology.
220
. Economists generally do not believe that limited natural resources impose a
binding constraint on income growth. Why?
ANSWER: Technology allows people to do more with fewer or alternative
resources. Examples in the text include more fuel-efficient automobiles, better
recycling, substituting plastic and fiber optics for cable, and improved
insulation. Market prices provide a measure of scarcity. Once we have
adjusted for inflation, market prices of natural resources are steady or falling.
221
. Why are saving and investment important if a society is to become more
productive?
ANSWER: One way for society to become more productive is to generate a larger
capital stock. Because capital is a produced factor of production, society can
change the amount of capital it has by producing more capital goods. If more
capital goods are produced, however, fewer consumer goods can be produced.
Hence, consumers must consume less and save more. Therefore, if a society
wishes to increase future productivity by increasing the capital stock, the

society can do so by investing more and saving more in the present.
222
. What does the statistical evidence show concerning the correlation between
the share of GDP devoted to investment and growth of income per person?
Does this imply anything about causation? What does economic theory
suggest about which variable causes the other to change?
ANSWER: There is a positive statistical correlation between the share of GDP
devoted to investment and the rate of economic growth. The correlation does
not prove causal direction. However, economic theory provides strong reason
to believe that higher shares of GDP devoted to investment leads to higher
rates of economic growth. The more an economy invests the more capital an
economy accumulates and the more capital an economy has, the more it can
produce.
223
. What is the "catch-up effect" in economic growth, and how is it related to the
law of diminishing returns?
ANSWER: The catch-up effect is based on the idea that it is easier for a country to
grow fast if it starts out relatively poor. This is because poor countries have
very low capital–labor ratios, hence, a given increase in capital per worker will
have a large impact on productivity in those countries. On the other hand, the
law of diminishing returns states that rich nations, which already have high
capital–labor ratios, experience only a small increase in productivity from a
given increase in capital per worker. Hence, a given rate of investment in a
poor country leads to a higher rate of economic growth than does the same rate
of investment in a rich country. As a country develops, growth rates slow
down. In the long run, the higher saving rate leads to a higher level of
productivity and income, but not to higher rates of growth in those variables.
224
. 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.
ANSWER: 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.
225
. A puzzle: The share of GDP devoted to investment was similar for the United
States and South Korea over the last 40 years. However, South Korea had a 6
percent growth rate of average annual income, while the United States had
only a 2 percent growth rate over that last 40 years. How can this be
explained?
ANSWER: The solution to the puzzle 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 capital poor country could increase their
output considerably with even a little more capital.
226
. Is there a way for a country to increase its investment in capital without
increasing domestic saving? Explain.
ANSWER: A country can increase its investment in capital through borrowing
from foreigners. This kind of investment can take the form of foreign direct
investment, where a capital investment is owned and operated by a foreign
entity, or through foreign portfolio investment, where the real capital
investment is financed with foreign money but operated by domestic residents.
227
. Classify each of the following as foreign direct investment or foreign portfolio
investment or neither.
a. A Mexican company builds and operates a textbook publishing company
in Texas.
b. Jerry, a U.S. citizen, buys stock in a Japanese computer company.
c. Jane, a Canadian citizen, buys stock in a Canadian brewing company.
d. Judy buys bonds issued by an Italian movie studio.
ANSWER: a. This is foreign direct investment.

b. This is foreign portfolio investment.
c. This is neither foreign direct investment nor foreign portfolio investment,
since Jane is purchasing assets of a domestic company.
d. This is foreign portfolio investment
228
. Suppose that a firm from Poland opens a factory in the United States. How
does this affect the GDP and GNP of the United States? How does it affect
the GDP and GNP of Poland? Explain your answer.
ANSWER: GDP includes income earned within a country by residents and
nonresidents. GNP includes production by residents of a country, regardless of
where it is produced. So, the factory raises the GDP of the United States, but
not of Poland. It raises the GNP of both countries since some of the income
generated by the factory will go to U.S. workers and some will go to the
Polish owners. All of the income generated by the factory is included in U.S.
GDP, but only part of it is included in GNP, so GDP rises by more than GNP.
229
. How do economists view education as a way of increasing the productivity of
a society?
ANSWER: Economists believe that education, which represents investment in
human capital, is at least as important as is investment in real capital in raising
productivity. People with more knowledge are likely to be able to produce
more and to take advantage of changing technology.
230
. In what way might education provide positive externalities for society?
ANSWER: An educated person might invent new products or generate new ideas
about how best to produce goods and services. An educated person might
discover a cure for cancer. As these ideas and developments enter society's
pool of knowledge, so everyone can use them, they are an external benefit of
education.
231
. In addition to investment in physical and human capital, what other public
policies might a country adopt to increase productivity?
ANSWER: 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.

232
. Why are property rights important for the growth of a nation's standard of
living?
ANSWER: 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, hence, will reduce the standard of living.
233
. How might political instability depress a nation's standard of living?
ANSWER: Political instability interferes with the enforcement of property rights,
hence, it reduces people's incentives to save, invest, and start new businesses.
It also reduces incentives for foreigners to invest in the country. Lower saving
and investment reduces productivity. Fewer new businesses mean fewer new
jobs and less technological progress.
234
. How do inward-oriented policies affect a nation's growth?
ANSWER: 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. However, inward-oriented trade
policies are like a country choosing to restrict the use of superior technologies.
235
. Have poor countries that followed outward-oriented policies had relatively
low or relatively high output growth rates? What would explain this?
ANSWER: Countries like South Korea, Singapore, and Taiwan that initiated
outward-oriented policies have had high growth rates. This likely is the result
of gains from trade that allow these countries to produce what they can
produce comparatively cheap, and then trade these goods to get funds to buy
goods they need from countries that produce those goods relatively cheap.
236
. Your first impression might be that higher population growth would lead to
higher standards of living because there would be more workers. Yet countries
with high population growth tend to have lower standards of living. In what
ways can high population growth lead to a lower standard of living?
ANSWER: It is important to remember that income per person is closely tied to the
standard of living. With greater population, the amount of other inputs per
worker falls. This decrease results in lower productivity, and so lower output
per worker. This is evident for example for human capital where a rapidly
increasing population burdens the educational system.
236
~ANSWER:
It is important to remember that income per person is closely tied to the standard of living. With greater
population, the amount of other inputs per worker falls. This decrease results in lower productivity, and
so lower output per worker. This is evident for example for human capital where a rapidly increasing
population burdens the educational system.
105
~ANSWER:
b. raise real GDP, but decrease real GDP per person.
106
~ANSWER:
d. in developed countries population growth is 3 percent, in many developing countries it is 5 percent.
107
~ANSWER:
b. technological knowledge has increased.
108
~ANSWER:
b. public good.

237
. Countries have tried various methods to increase their 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?
ANSWER: 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
109
~ANSWER:
d. Both a and b are correct.
110
~ANSWER:
b. public goods.
111
~ANSWER:
a. private goods, and increase the incentive to engage in research.
112
~ANSWER:
b. pursues inward-looking policies.
113
~ANSWER:
b. 3.2 percent.
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.
238
. How is knowledge a public good?
ANSWER: Once a person discovers an idea, the idea enters society's pool of
knowledge, which many other people can use. It is difficult or impossible to
114
~ANSWER:
d. 1.3 percent.
115
~ANSWER:
116
~ANSWER:
a. It appears that this may be attributed to a slowdown in technological progress.
117
~ANSWER:
c. have high tax rates.
118
~ANSWER:
a. high trade barriers.
exclude others from using your ideas, and so difficult or impossible to collect
payment from those who use your ideas.
239
. Do you think patent laws help or hurt economic growth? Explain.
ANSWER: Patent laws encourage invention and innovation through granting
property rights to the patented product or process. In this way, the laws
encourage technological progress and economic growth. By protecting the
product or process from competition, however, the patent laws slow down the
119
~ANSWER:
120
~ANSWER:
c. lend support to the invisible hand by maintaining property rights and political stability.
121
~ANSWER:
F
TYPE:T KEY1: D OBJECTIVE: 1 RANDOM: Y
122
~ANSWER:
T
123
~ANSWER:
T
diffusion of the developed technology. Most economists believe that the

advantages of patents in encouraging innovation outweigh the disadvantages
of patents in slowing down the rate of technological diffusion.
124
~ANSWER:
F
125
~ANSWER:
T
126
~ANSWER:
T
127
~ANSWER:
T
128
~ANSWER:
F
240
. In what ways can government encourage economic growth through
technological improvement? Has the U.S. government been active in this
area? Explain.
ANSWER: The two major ways government can encourage technological
improvement are the patent system, which conveys property rights to the
holder of the patent for a given number of years, and through the support of
research and development activities in the economy. Both of these methods
encourage innovation and invention by providing a larger reward for
successful technology, and by reducing the private cost of developing
129
~ANSWER:
F
130
~ANSWER:
T
131
~ANSWER:
T
132
~ANSWER:
T
133
~ANSWER:
F
technology. The U.S. government has strong patent protection, and has
supported research and development for well over a century. Whereas, in the
last century, government-sponsored research was concentrated in agriculture,
since World War II government has taken an active role in sponsoring
research in a wide variety of scientific and technical areas.
134
~ANSWER:
T
135
~ANSWER:
F
136
~ANSWER:
F
137
~ANSWER:
F
138
~ANSWER:
T
241
. What does the productivity slowdown refer to? How has it affected the
standard of living?
ANSWER: From 1959 to 1973 productivity grew 3.2 percent per year. From 1973
to 1998 productivity grew at 1.3 percent per year. As productivity growth
slowed, so did the growth of real wages and real income. Consequently, the
standard of living has not increased as rapidly.
139
~ANSWER:
T
TYPE: T DIFFICULTY: 3 KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
140
~ANSWER:
T
141
~ANSWER:
F
142
~ANSWER:
T
143
~ANSWER:
T
242
. What is the productivity slowdown usually attributed to? Is it unique to the
United States and recent times?
ANSWER: The decrease in the growth rate of productivity is usually attributed to
slow technological progress. Other industrial countries also experienced a
slowdown. Although productivity growth slowed from its 1950–1973 rate,
productivity growth remained high relative to other periods in the last 125
years.
144
~ANSWER:
T
145
~ANSWER:
T
146
~ANSWER:
F
147
~ANSWER:
F
148
~ANSWER:
T
243
. In general, African countries have had low or even negative real income per
person growth rates. What explains these low and negative growth rates?
ANSWER: The low growth has been attributed to legal and geographic trade
barriers, high tax rates, low saving rates, and political instability.
244
. What might the African governments do to foster higher economic growth?
ANSWER: They could make, perhaps with outside support, better efforts to
increase the peace and thus encourage investment and saving. They could
149
~ANSWER:
F
150
~ANSWER:
T
151
~ANSWER:
F
152
~ANSWER:
T
153
~ANSWER:
T
focus government spending on essential things like public order, the judicial
system, and basic health and education. By focusing on these basic functions,
they could decrease tax rates on production and trade.
154
~ANSWER:
F
155
~ANSWER:
T
156
~ANSWER:
T
157
~ANSWER:
T
158
~ANSWER:
T
159
~ANSWER:
T
160
~ANSWER:
F
161
~ANSWER:
T
162
~ANSWER:
T
163
~ANSWER:
T
164
~ANSWER:
F
165
~ANSWER:
T
166
~ANSWER:
F
167
~ANSWER:
T
168
~ANSWER:
T
169
~ANSWER:
T
170
~ANSWER:
F
171
~ANSWER:
F
172
ANSWER:
T
173
~ANSWER:
T
174
~ANSWER:
T
175
~ANSWER:
F
176
~ANSWER:
T
177
~ANSWER:
T
178
~ANSWER:
T
179
~ANSWER:
T
180
~ANSWER:
T
181
~ANSWER:
T
182
~ANSWER:
T
183
~ANSWER:
F
184
~ANSWER:
T
185
~ANSWER:
T
186
~ANSWER:
F
187
~ANSWER:
T
188
~ANSWER:
F
189
~ANSWER:
T
190
~ANSWER:
T
191
~ANSWER:
T
192
~ANSWER:
T
193
~ANSWER:
T
194
~ANSWER:
F
195
~ANSWER:
T
196
~ANSWER:
F
197
~ANSWER:
T
198
~ANSWER:
T
199
~ANSWER:
T
200
~ANSWER:
T
201
~ANSWER:
Richer countries have more automobiles, televisions, and telephones per person. They also tend to have
better nutrition, safer housing, better health care, and longer life expectancy.
202
~ANSWER:
The average income (real GDP per capita) in the United States was $28,740 in 1997, approximately 8 times
as high as in China ($3,570 in 1997), and more than 25 times as high as in Bangladesh($1,050 in 1997).
203
~ANSWER:
Real GDP per person is computed as real GDP divided by population. For Switzerland it is 284,119/7 =
$40,588. For Canada it is 580,872/30 = $19,364. For Mexico it is 368,059/96 = $4,021.
Countries that have larger populations tend to have more workers and so more real GDP. Comparing, the
real GDP numbers themselves is misleading. Mexico’s real GDP is about 40 percent more than
Switzerland’s, but Mexico’s per person real GDP is about one-tenth that of Switzerland.
204
~ANSWER:
Nominal GDP has increased partly because prices increased. The dollars that people earned in 1997 did
not buy as many goods as they did back in 1957. The increase in nominal GDP also reflects a growing
population and so a growing number of workers. To compare how much a typical person had in 1957
with how much a typical person had in 1997 we need to have numbers on real GDP per person.
(Notes concerning some specific details not given in the text: From 1957 to 1997 real GDP person more or
less doubled. Population in 1997 was about 1.6 times population in 1957, and prices in 1997 were about 5
times those in 1957.)
205
~ANSWER:
Real per capita GDP grew at an average rate of 1.75 percent per year in the United States between 1870
and 1997, at an average annual rate of 2.82 percent in Japan between 1890 and 1990, and at an average
annual rate of 0.08 percent in Bangladesh between 1900 and 1987.
206
ANSWER:
Income per person in 1989 was $6.600,000/247 = about $26,720. Income per person in 1999 was
$8,900,000/273 = about $32,600. Income per person grew by (32600-26720)/26720 = 22 percent.
207
ANSWER:
a. 70 years
b. 35 years
c. 23 1/3 years
d. 10 years
e. 7 years

208
~ANSWER:
To find how long it takes output to double we use the rule of 70. Since 70/1.75 = 40, it takes forty years for
output to double. If output doubles every 40 years, it will double 200/40 = 5 times in the next 200 years
and so be $28,750x2x2x2x2x2 = $28,750x32 = $920,000.
209
~ANSWER:
US income per person is $28,750/$6,250 = 4.6 times Brazilian income per person. With a growth rate of
1.75, income doubles about every 70/1.75 = 40 years. So in 120 years US income would double 120/40 = 3
times and so be $28,750x2x2x2 = $230,000. With a growth rate of 2.4 income doubles about every 70/2.4 =
29 years. So, in 120 years Brazilian income will have doubled 120/29 = about 4 times and so be about
$6,250x2x2x2x2 = $100,000. Therefore, US income would be $230,000/$100,000 = 2.3 times Brazilian
income.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
210
~ANSWER:
For each 70/1.4 = 50 years we go back output would be half of its current level. If we go back 500 years
ago, we would have to half output 10 times. Thus, output would only be 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x
1/2 x 1/2 x 1/2 x 1/2 = (1/2)10 = 1/1024. Even using the income of a rich country, this would be less than $30
per person.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
211
~ANSWER:
In the simplest terms, the variation in living standards across nations is a result of the variation in labor
productivity across nations.
212
~ANSWER:
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.
213
~ANSWER:
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.
214
~ANSWER:
A production function is a mathematical representation of the relationship between the quantity of inputs
used in production and the quantity of output from production. 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.
215
~ANSWER:
When there is constant returns to scale if all factors were x times as high, output would be x times as
high.
216
~ANSWER:
physical capital – lathes
human capital – the manager’s understanding of how the factory works
217
~ANSWER:
Natural resources are one of the factors of production. However, a country need not have a lot of natural
resources in order to be rich – consider Japan and Switzerland. To a large extent, natural resources are
what an economy and its technology make of them. Some countries have abundant natural resources and
so are rich – consider the major oil producing countries. However, natural resources are just one of
several factors of production. Obviously countries in the past had abundant natural resources and yet
lacked the physical capital, human capital, and technology to produce much with them. Further, while
abundant natural resources may make a country rich, a given stock of natural resources does not create
growth in income per person.
218
~ANSWER:
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 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 producing these goods by hand. (Can someone help me set the clock on my VCR?)
219
~ANSWER:
Productivity is the amount produced per hour of labor. If a farm family can produce much more in a
year, on average they produce much more in an hour as well. Technology is likely responsible for most of
the increase in productivity. A farm family today clearly has more capital, but not enough to explain such
a large increase. A modern farm family’s understanding of agriculture is better than their colonial
counterparts, but not so much because they had more education as because society’s understanding of
how to produce food has increased. It is difficult to imagine a very well-educated farm family with
considerable capital but restricted to using colonial technology, producing more than a small fraction of
what could be produced by a farm family with modest modern education and capital taking advantage of
modern technology.
220
~ANSWER:
Technology allows people to do more with fewer or alternative resources. Examples in the text include
more fuel-efficient automobiles, better recycling, substituting plastic and fiber optics for cable, and
improved insulation. Market prices provide a measure of scarcity. Once we have adjusted for inflation,
market prices of natural resources are steady or falling.
221
~ANSWER:
One way for society to become more productive is to generate a larger capital stock. Because capital is a
produced factor of production, society can change the amount of capital it has by producing more capital
goods. If more capital goods are produced, however, fewer consumer goods can be produced. Hence,
consumers must consume less and save more. Therefore, if a society wishes to increase future
productivity by increasing the capital stock, the society can do so by investing more and saving more in
the present.
222
~ANSWER:
There is a positive statistical correlation between the share of GDP devoted to investment and the rate of
economic growth. The correlation does not prove causal direction. However, economic theory provides
strong reason to believe that higher shares of GDP devoted to investment leads to higher rates of
economic growth. The more an economy invests the more capital an economy accumulates and the more
capital an economy has, the more it can produce.
223
~ANSWER:
The catch-up effect is based on the idea that it is easier for a country to grow fast if it starts out relatively
poor. This is because poor countries have very low capital-labor ratios, hence, a given increase in capital
per worker will have a large impact on productivity in those countries. On the other hand, the law of
diminishing returns states that rich nations, which already have high capital-labor ratios, experience only
a small increase in productivity from a given increase in capital per worker. Hence, a given rate of
investment in a poor country leads to a higher rate of economic growth than does the same rate of
investment in a rich country. As a country develops, growth rates slow down. In the long run, the higher
saving rate leads to a higher level of productivity and income, but not to higher rates of growth in those
variables.
224
~ANSWER:
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.
225
~ANSWER:
The solution to the puzzle 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 capital poor country could increase their output considerably
with even a little more capital.
226
~ANSWER:
A country can increase its investment in capital through borrowing from foreigners. This kind of
investment can take the form of foreign direct investment, where a capital investment is owned and
operated by a foreign entity, or through foreign portfolio investment, where the real capital investment is
financed with foreign money but operated by domestic residents.
227
~ANSWER:
a. This is foreign direct investment.
b. This is foreign portfolio investment.
228
~ANSWER:
GDP includes income earned within a country by residents and nonresidents. GNP includes production
by residents of a country, regardless of where it is produced. So, the factory raises the GDP of the United
States, but not of Poland. It raises the GNP of both countries since some of the income generated by the
factory will go to U.S. workers and some will go to the Polish owners. All of the income generated by the
factory is included in U.S. GDP, but only part of it is included in GNP, so GDP rises by more than GNP.
229
~ANSWER:
Economists believe that education, which represents investment in human capital, is at least as important
as is investment in real capital in raising productivity. People with more knowledge are likely to be able
to produce more and to take advantage of changing technology.
230
~ANSWER:
An educated person might invent new products or generate new ideas about how best to produce goods
and services. An educated person might discover a cure for cancer. As these ideas and developments
enter society's pool of knowledge, so everyone can use them, they are an external benefit of education.
231
~ANSWER:
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.
232
~ANSWER:
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, hence, will reduce the standard of living.
233
~ANSWER:
Political instability interferes with the enforcement of property rights, hence, it reduces people's
incentives to save, invest, and start new businesses. It also reduces incentives for foreigners to invest in
the country. Lower saving and investment reduces productivity. Fewer new businesses mean fewer new
jobs and less technological progress.
234
~ANSWER:
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. However, inward-oriented trade
policies are like a country choosing to restrict the use of superior technologies.
235
~ANSWER:
Countries like South Korea, Singapore and Taiwan that initiated outward-oriented policies have had high
growth rates. This likely is the result of gains from trade that allow these countries to produce what they
can produce comparatively cheap, and then trade these goods to get funds to buy goods they need from
countries that produce those goods relatively cheap.
237
~ANSWER:
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.
238
~ANSWER:
Once a person discovers an idea, the idea enters society's pool of knowledge, which many other people
can use. It is difficult or impossible to exclude others from using your ideas, and so difficult or impossible
to collect payment from those who use your ideas.

239
~ANSWER:
Patent laws encourage invention and innovation through granting property rights to the patented
product or process. In this way, the laws encourage technological progress and economic growth. By
protecting the product or process from competition, however, the patent laws slow down the diffusion of
the developed technology. Most economists believe that the advantages of patents in encouraging
innovation outweigh the disadvantages of patents in slowing down the rate of technological diffusion.
240
~ANSWER:
The two major ways government can encourage technological improvement are the patent system, which
conveys property rights to the holder of the patent for a given number of years, and through the support
of research and development activities in the economy. Both of these methods encourage innovation and
invention by providing a larger reward for successful technology, and by reducing the private cost of
developing technology. The US government has strong patent protection, and has supported research
and development for well over a century. Whereas, in the last century, government sponsored research
was concentrated in agriculture, since World War II government has taken an active role in sponsoring
research in a wide variety of scientific and technical areas.
241
~ANSWER:
From 1959 to 1973 productivity grew 3.2 percent per year. From 1973 to 1998 productivity grew at 1.3
percent per year. As productivity growth slowed, so did the growth of real wages and real income.
Consequently, the standard of living has not increased as rapidly.
242
~ANSWER:
The decrease in the growth rate of productivity is usually attributed to slow technological progress. Other
industrial countries also experienced a slowdown. Although productivity growth slowed from its 1950–
1973 rate, productivity growth remained high relative to other periods in the last 125 years.
243
~ANSWER:
The low growth has been attributed to legal and geographic trade barriers, high tax rates, low saving
rates, and political instability.
244
~ANSWER:
They could make, perhaps with outside support, better efforts to increase the peace and thus encourage
investment and saving. They could focus government spending on essential things like public order, the
judicial system, and basic health and education. By focusing on these basic functions, they could decrease
tax rates on production and trade.

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Chapter 24

Production and Growth

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c. 3 fish per hour.

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wishes to increase future productivity by increasing the capital stock, the

ANSWER: a. This is foreign direct investment.

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a good education and desirable employment tend to want to have fewer

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diffusion of the developed technology. Most economists believe that the

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TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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to collect payment from those who use your ideas.

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