Chapter 11 Macro Econ
Why do many low-income countries have low growth rates?
All of the above are reasons why some low-income countries have low growth rates.
Which of the following periods in U.S. economic history had the slowest growth rate, as measured by the average annual increase in real GDP per hour worked?
1974dash-1995
Consider the choices below. All of these except one truly represent the record of productivity growth in the United States from 1800 to the present. Find the one that does not belong.
GDP per capita fell rapidly between 1900 and 1950
Have poor countries been catching up to rich countries?
There has been catch-up by some poor but industrialized countrie
Productivity growth rates matter because
productivity growth rates have a big impact on future economic growth.
Growth rates matter because living standards may stagnate in an economy that grows too slowly.
true
Consider the figure on the right. It shows growth rates in real GDP per hour worked in the United States for various periods from 1900 onward. According to the figure, economic growth (as measured by growth in real GDP per hour worked) in the United States was slowest during the period from
1974 to 1995.
[Related to the Making the Connection] In 2014, real GDP per capita in Mexico increased by 0.9 percent. A Mexican economist was quoted in an article in the Wall Street Journal as saying, "It's clearly insufficient if we want to significantly reduce poverty and move Mexico toward a middle-class country." Source: Juan Montes, "Mexican Economy Expanded Modestly in 2014," Wall Street Journal, February 20, 2015. Given a growth rate of 0.9 percent, it would take about nothing years for the standard of living of the average person in Mexico to double. (Enter your response rounded to the nearest whole number.)
78
Which of the following are assertions made by opponents of globalization?
All of the above are assertions made by opponents of globalization
[Related to the Chapter Opener] An article on the Mexican economy in the Economist notes, "A huge, unproductive informal sector and general lawlessness also drag the economy down." Source: "The 100-Year View," Economist, May 2, 2015. If these factors were the main barriers to more rapid economic growth in Mexico, would that be good news or bad news for the Mexican government's attempts to increase its economy's growth rate?
An unproductive informal sector and general lawlessness are obstacles to productivity growth, so this is bad news.
President Obama said such sentiment would be "a big mistake" for the U.S. economy because, "If we don't write the rules,
China will write the rules out in that region."
Which of the following statements about compounding is correct?
Compounding magnifies even small differences in interest rates or growth rates over long periods of time.
Globalization entails all of the following except:
Cultural exchange between nations.
The role of the entrepreneur becomes much more important in the new growth theory LOADING... long dash—the endogenous growth modellong dash—than in the traditional economic growth model LOADING... because
In the new growth theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.
Assume the analyst is correct that urbanization is the core driver of economic growth in China. Will China be able to continue to experience high rates of economic growth in the long run?
It is unlikley because the process of urbanization will eventually slow down and growth will require technological progress.
Refer to the graph to the right. According to the economic concept of catch-up LOADING... , which of the following is CORRECT?
Poorer countries should grow more quickly and will be at point A.
A free press could help reduce corruption, which would then promote growth, by all of the following except:
Publishing gossip columns about a politician's personal matter.
How does technological change affect the per-worker production function?
Technological change shifts the per-worker production function up
The average annual growth rate is the ▼ rate at which GDP must grow on average each year average rate of growth in GDP percentage increase in GDP between 2005 and 2015, and the total percentage increase in real GDP is the ▼ absolute increase in real GDP between the years 2005 and 2015 average rate of growth over the years 2005 to 2015 percentage increase in real GDP between the two years 2005 and 2015 .
The average annual growth rate is the rate at which GDP must grow on average each year between 2005 and 2015, and the total percentage increase in real GDP is the percentage increase in real GDP between the two years 2005 and 2015 .
How might the growth rates in the figure be different if they were calculated for real GDP per capita instead of per hour worked? (Hint:How do you think the number of hours worked per person has changed in the United States since 1900?)
The growth rate of real GDP per capita would be higher than the growth rate of real GDP per hour.
The graph on the right shows the relationship between country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth are true:
The industrial countries such as Ireland and Japan that had the lowest incomes in 1960 grew the fastest between 1960 and 2004.
The figure in the window on the right shows how growth rates of real GDP per capita for the entire world have changed over long periods. Based on the data from the figure on the right which one of the following statements is false?
The smallest acceleration in growth occurred during the twentieth century as the average annual growth rate increased from 1.3 percent per year to 2.3 percent per year.
[Related to Solved Problem #4] Consider the statistics in the following table: Country Real GDP per Capita in 1960 Growth in Real GDP per capita, 1960-2011 China $331 6.66% Uganda 657 1.37 Madagascar 1,051 minus−0.23 Ireland 7,223 3.25 United States 15,398 2.02 These statistics ▼ are are not consistent with the economic growth model's predictions of catch-up, because although there has been catch-up among ▼ all the countries in the world the industrialized countries , there ▼ has not been has been catch-up among ▼ all the countries in the world indusrialized countries .
These statistics are not consistent with the economic growth model's predictions of catch-up, because although there has been catch-up among the industrialized countries , there has not been catch-up among all the countries in the world
Using GDP per capita in 2014 (measured in U.S. dollars, corrected for differences across countries in the cost of living), identify which one of the following statements is true:
Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.
An article in the New York Times notes that since 2001, Italy has had the lowest rate of growth in labor productivity among European countries that use the euro common currency. The article quoted Italy's economy minister as saying, "The real tragedy for Italy is falling productivity." At the time the minister made these remarks, the unemployment rate in Italy was greater than 12 percentlong dash—more than twice the rate in Germany, the United Kingdom, or the United States. Source: Reuters, "Italy Economy Minister Warns Deflation Would Be 'Disaster," New York Times, May 31, 2014. Despite the high unemployment rate, Italy's economy minister calls low productivity growth rates "the real tragedy" because
a low rate of productivity growth means that the standard of living in Italy will be increasing only slowly in the long run.
Which of the following is the definition of the new growth theory?
a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives
Along the downward-sloping catch-up line, a country near the top of the line is
a poor country growing rapidly
The lines in the following three graphs show the average relationship between the initial level of real GDP per capita and the growth rate of real GDP per capita for three groups of countries over a given time period. Match each group of countries with the graph that best depicts the relationship between the initial level of real GDP per capita and the growth rate of real GDP per capita for that group.
a. All countries for which statistics are available, 1960-2011 1 b. United States, Western Europe, Canada, and Japan, 1990-2014 2 c. Current high-income countries, 1960-2011 3
A country's rate of economic growth is important because
an economy that grows too slowly fails to raise the living standards of its citizens.
If the Roman Empire had been able to bring about sustained economic growth, it is likely that the standard of living today would ▼
be substantially higher
Some argue that globalization hurts rather than helps the U.S. economy because they believe free-trade agreements have
caused an outflow of manufacturing jobs from the U.S. to other nations.
Comparing the Chinese economy today and the Soviet economy in the 1980s, it can be seen that both countries had a history of
central planning and have introduced market systems, but have experienced problems in making the transition that have, and will continue to, hinder future growth.
Which countries grow faster?
countries that have a strong rule of law
Which countries have experienced faster economic growth?
countries that have been generally more open to foreign trade and investment
The near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt
did not increase real GDP per capita, but increased productivity and human capital resulting in a higher standard of living.
Consider the per-worker production function LOADING... to the right. Equal increases in the quantity of capital per hour worked lead to increases in output per hour worked.
diminishing
For the range of initial Real GDP per capita11 to Real GDP per capita2, the figure ▼ does does not support the catch-up prediction, because in the figure on the right, for the range of initial Real GDP per capita11 to Real GDP per capita2, ▼ there does not exist there exists a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
does not, does not exist
[Related to Solved Problem #4] In the figure to the right, each dot represents a country with its initial real GDP per capita and its growth rate of real GDP per capita. a. For the range of initial Real GDP per capita from 0 to Real GDP per capita2, the figure ▼ does does not support the economic growth model's LOADING... prediction of catch-up because in the figure on the right, for the range of initial Real GDP per capita from 0 to Real GDP per capita2, ▼ there does not exist there exists consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
does not, there does not exist
b. For the range of initial Real GDP per capita from 0 to Real GDP per capita1, the figure ▼ does does not support the catch-up prediction, because in the figure on the right, for the range of initial Real GDP per capita from 0 to Real GDP per capita1, ▼ there exists there does not exist a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
does, there exists
Which of the following is not a government policy that will increase the accumulation of knowledge capital?
encouraging the growth of labor unions
Most of the poor countries experience slow growth because of all the following reasons except
excellent public health and education.
Which of the following is NOT a factor explaining the slow growth of the Mexican economy?
failures of the medical system
In most countries, political stability has little to do with economic growth.
false
investment tax credits allow
firms to deduct from their taxes some fraction of the funds they have spent on investment.
When a corporation purchases or builds a facility in a foreign country, it is called
foreign direct investment.
The government policy that does not increase economic growth is
foreign trade policy that favors imposing a high tariff on imported high-tech goods.
In the United States, what is a key source of funds for start-up firms bringing new technologies to market?
funding from venture capital firms
A columnist in the New York Times observes that, "many analysts agree that economic reform, of which integration into the global economy was a key element, has lifted millions of people out of poverty in India." Source: Vivek Dehejia, "Has Globalization Helped India's Poor?" New York Times, October 7, 2011. The term "integration into the global economy" means
globalization and more integration of trade.
Other high-income countries have had trouble completely closing the gap in real GDP per capita with the United States because the United States has
greater flexibility in labor markets and greater efficiency in the financial system.
More people in high-income countries than in low-income countries tend to believe that rapid rates of economic growth are not desirable. Recall the concept of a "normal good." Some people in ▼ low high -income countries are ▼ satisfied concerned with certain consequences of rapid economic growth, such as low wages paid by multinational firmslow wages paid by multinational firms.
high -income countries are concerned
China has experienced
high rates of growth in the short run by spending heavily on physical capital, infrastructure, and property but their lack of democracy can slow growth in the long run
Some economists argue that the development of information technology (IT) caused the ▼ higher lower productivity growth that began in the mid-1990s.
higher
Developing countries have benefited from globalization, because globalization can do all of the following except
impose trade barriers and tariffs on imported goods so as to protect domestic industries.
In the 1980s and 1990s, a small group of countries experienced high rates of growth. These countries are sometimes called the newly industrializing countries. Where are most of these countries located?
in East Asia
For each of the following policies, indicate whether it will or will not increase the rate of economic growth in the United States. a. Congress passes an investment tax credit, which reduces a firm's taxes if it installs new machinery and equipment. It is likely that the rate of economic growth will increase . b. Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state sales taxes they pay. It is likely that the rate of economic growth will increase . c. Congress provides more funds for low-interest loans to college students. It is likely that the rate of economic growth will increase .
increase,increase,increase
A column in the Wall Street Journal considers two observations about the U.S. economy: "We live in an era of accelerating technological progress ...." and "In the years since the recession ... the economy has been growing very slowly." Source: Josh Zumbrun, "Goldman Sachs and J.P. Morgan Can't Agree Why the Economy's Productivity Has Slumped," Wall Street Journal, June 16, 2015. The writer correctly concludes that "Both statements can't be completely correct" because
increases in productivity usually result in greater economic growth.
[Related to Solved Problem #2] Suppose the per-worker production function was shaped as shown in the graph at right. If a country was accumulating increasing quantities of capital per hour worked, this country would experience
increasing labor productivity and higher levels of economic growth.
[Related to Making the Connection] Pranab Bardhan, an economist at the University of California, Berkeley, argues: "China may be close to exhausting the possibilities of technological catch-up with the West, particularly in manufacturing." Source: Pranab Bardhan, "The Slowing of Two Economic Giants," New York Times, July 14, 2013. When Bardhan refers to "technological catch-up," he means that China
is experiencing diminishing returns to investments in technology.
Economist Robert Gordon of Northwestern University has argued that: My interpretation of the [information] revolution is that it is increasingly burdened by diminishing returns. The push to ever-smaller devices runs up against the fixed size of the human finger that must enter information on the device. Most of the innovations since 2000 have been directed to consumer enjoyment rather than business productivity, including video games, DVD players, and iPods. iPhones are nice, but the ability to reschedule business meetings and look up corporate documents while on the road already existed by 2003. Source: Robert J. Gordon, "U.S. Productivity Growth over the Past Century with a View of the Future, "National Bureau of Economic Research Working Paper 15834, March 2010. If Gordon's observations about the information revolution are correct, that implies
it will be difficult to sustain high growth rates in U.S. labor productivity in the future.
[Related to the Making the Connection] A study by the McKinsey Global Institute reported that labor productivity increased at an average annual rate of 5.8 percent between 1999 and 2013 in Mexico's large companies, but fell at an average annual rate of 6.5 percent over the same period for Mexico's smaller firms, such as family-owned stores and bakeries. Source: Anthony Harrup, "Two Economies Explain Mexico's Productivity Quandary," Wall Street Journal, March 27, 2014. Productivity growth would be much higher for Mexico's largest companies than for its smaller companies because the
larger companies have greater access to better technology which stimulates productivity growth.
The economic growth model predicts that the
level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.
One of the lessons from the economic growth model presented in this chapter is that technological change is
more important than increases in physical capital in explaining long-run growth.
In 2015, President Barack Obama was quoted in an article in the Wall Street Journal as warning against "rising anti-globalization sentiment," which the president called "a big mistake." In particular, President Obama suggested that "China would step into the economic vacuum the U.S. would create if it fails to complete and enact a free-trade deal" and supported renewal of the Export-Import Bank, a credit agency, which finances the sale of U.S. goods overseas. Source: Gerald F. Seib, "Obama Presses Case for Asia Trade Deal, Warns Failure Would Benefit China," Wall Street Journal, April 27, 2015. When referring to "rising anti-globalization sentiment," President Obama meant
opposition to the Trans-Pacific Partnership, and efforts to kill the Export-Import Bank.
People who live in rural areas often have less access to capital and, as a result, their productivity is lower on average than the productivity of people who live in cities. An article in the New York Times quotes a financial analyst as arguing that "the core driver" of economic growth in China "is the simple process of urbanization." Source: Neil Irwin, "China Will Keep Growing. Just Ask the Soviets.," New York Times, October 24, 2014. The analyst's reference to the "process of urbanization" describes the
process of people moving from rural areas to cities.
Economist George Ayittey, in an interview on PBS about economic development in Africa, states that of the 54 African countries, only eight have a free press. For Africa's economic development, Ayittey argues strongly for the establishment of a free press. Source: George Ayittey, "Border Jumpers," Anchor Interview Transcript, WideAngle, PBS.org, July 24, 2005. A free press will be vital for enhancing
property rights and the rule of law and controlling corruption.
If Bardhan is correct, in the future, the Chinese economy might
realize slower economic growth.
Integration into the global economy has
reduced poverty in India by increasing the growth rate of the economy and a higher rate of economic growth generally results in faster poverty reduction.
The elimination of measles and childhood deaths from diarrhea will
remove a major impediment to growth, increase productivity and should eventually lead to increases in real GDP per capita
When a firm increases output by either replacing existing capital with more productive capital or by reorganizing how production takes place, that firm is experiencing
technological change.
Which of the following events marks the beginning of significant economic growth in the world economy?
the Industrial Revolution in England
The migration of highly educated and successful individuals from developing countries to high-income countries is called
the brain drain
In the long run, a country will experience an increasing standard of living only if
the country experiences continuing technological change.
[Related to the Making the Connection] Recently, economists Carol Shiue and Wolfgang Keller of the University of Texas at Austin published a study of "market efficiency" in the eighteenth century in England, other European countries, and China. If the markets in a country are efficient, a product should have the same price wherever in the country it is sold, allowing for the effect of transportation costs. If prices are not the same in two areas within a country, it is possible to make profits by buying the product where its price is low and reselling it where its price is high. This trading will drive prices to equality. Trade is most likely to occur, however, if entrepreneurs feel confident that their gains will not be seized by the government and that contracts to buy and sell can be enforced in the courts. Therefore, the more efficient a country's markets were, the more its institutions would have favored long-run growth. Shuie and Keller found that in 1770, the efficiency of markets in England was significantly greater than the efficiency of markets elsewhere in Europe and in China. Source: Carol H. Shiue and Wolfgang Keller, "Markets in China and Europe on the Eve of the Industrial Revolution," American Economic Review, Vol. 97, No. 4, September 2007, pp. 1189-1216. This finding supports Douglas North's argument concerning why the Industrial Revolution occurred in England because
the efficient market system thrived due to a stable British parliament and an independent court system.
According to Joseph Schumpeter, which of the following factors provides entrepreneurs with the most important incentive to bring the factors of production together to start new firms and to introduce new goods and services?
the profits entrepreneurs hope to earn
[Related to the Making the Connection] In his book The White Man's Burden, William Easterly reports that A vaccination campaign in southern Africa virtually eliminated measles as a killer of children. Routine childhood immunization combined with measles vaccination in seven southern Africa nations starting in 1996 virtually eliminated measles in those countries by 2000. A national campaign in Egypt to make parents aware of the use of oral rehydration therapy from 1982 to 1989 cut childhood deaths from diarrhea by 82 percent over that period. Source: William Easterly, The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good, New York: The Penguin Press, 2006, p. 241. As a result of the near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt
the standard of living for these low-income countries increased significantly.
[Related to Solved Problem #2] Shortly before the fall of the Soviet Union, the economist Gur Ofer of the Hebrew University of Jerusalem, wrote this: "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." Source: Gur Ofer, "Soviet Economic Growth, 1928-1985," Journal of Economic Literature, December 1987, p. 1,784. This turned out to be a very poor growth strategy because
there were diminishing returns to capital.
Over the past 20 years, other high-income countries have actually fallen further behind the United States in terms of real GDP per capita.
true
The Roman Empire lasted from 27 B.C. to 476 A.D. The empire was wealthy enough to build such monuments as the Roman Coliseum. Roman engineering skill was at a level high enough that aqueducts built during the empire to carry water long distances remained in use for hundreds of years. Yet the growth rate of income per capita during the empire was very low, perhaps zero. Consider the following list of preconditions for economic growth. Which one of the following reasons seems the most likely explanation for why the Roman Empire was unable to bring about sustained economic growth?
wars and revolutions.
When are additions to knowledge capital subject to diminishing returns?
when we look only at their effect on an individual firm
As these countries become able to increase their standards of living, there
will be economic growth but in order to have sustainable growth, these countries need their incomes to increase.
[Related to the Making the Connection] Economist Charles Kenny of the World Bank has argued that: The process technologieslong dash—institutions like laws and inventory management systemslong dash—that appear central to raising incomes per capita flow less like water and more like bricks. But ideas and inventionslong dash—the importance of ABCs and vaccines for DPTlong dash—really might flow more easily across borders and over distances. Source: Charles Kenny, Getting Better, New York: Basic Books, 2011, p. 117. If Kenny is correct, these facts indicate that these low-income countries
will have a healthier and more productive labor force as there is significant improvment in health, education, and civil and political liberties.
[Related to the Making the Connection] The lower birthrate in China
will shrink its labor force, which will include mostly less educated and less healthy older workers, resulting in a slower growth in its real GDP per capita.
Some economists argue that the apparent slowdown in productivity growth in the United States in recent years is a measurement problem resulting from the failure of GDP to capture the effects of many recent innovations, such as cloud computing. James Manyika, head of technology at McKinsey & Company, argues that for many of these innovations, "we have all these benefits but we're not paying for them." Source: Timothy Aeppel, "Silicon Valley Doesn't Believe U.S. Productivity Is Down," Wall Street Journal, July 16, 2015. Before the arrival of the Internet, people looking for facts, such as the population of France or the salary of the president of the United States, had to go to the library to look them up. Now people can find that information in a few seconds with a Google search. Are the benefits to you of being able to do a Google search included in GDP?
No, because the benefits are diffused throughout the economy.
It has been argued that the slowdown in U.S. productivity growth in recent years is just a measurement problem. Is your answer above consistent with that argument?
Yes, because the benefits are difficult to measure.
Economics arrives at the conclusion that economic growth will always improve economic well-being. Do you agree?
Yes, economic growth increases living standards, improves health and education, and builds a corruption-free society.