Chapter 9 - Global Economic Growth and Development

Your father earned​ $34,000 per year in 1984. To the nearest​ dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is​ 104?

$70288

This​ nation's economic growth rate is calculated as​ the:

%change in per capita real GDP = (Per capita real GDPn - Per capita real GDP n-1) / (per capita real GDP n-1)

How does the U.S. economy create and destroy millions of jobs each​ year?

*Some businesses are expanding, while others are contracting. *In the market system, new firms are constantly entering and exiting various industries.

As nations become​ richer, average family size increases.

False

Today's secular stagnation trend first began in the United States.

False

Real standards of living can only go up with positive economic growth.

False -Real standards of living can go up without any positive economic growth.

Per capita economic growth is used to proxy a change in a​ nation's

Standard of living

Real interest rate

The nominal interest rate minus the inflation rate. The real interest rate corrects the nominal interest rate for the effect of inflation on purchasing power. It provides a better measure of the true cost of borrowing and the true return to lending than does the nominal interest rate.

During the Great Depression of the​ 1930s

some people were unemployed for years at a time

The establishment​ survey,

sometimes called the payroll​ survey, samples about​ 300,000 businesses and compiles information on employment based on company payrolls.

Which of the following factors are highly related to the pace of economic​ development?

- limiting protectionism - developing an educated population - establishing a system of property rights D. All of the above.

If the nominal interest rate is​ 6% and the inflation rate is​ 9%, then the real interest rate is

-3%

If a​ 3-month Treasury bill pays​ 5.5% and the change in the consumer price index​ (CPI) is​ 4.7%, what is the real interest rate​ (the true return to​ lending)?

0.8%

Even when inflation is perfectly​ anticipated, some individuals will experience a cost.

1. Some​ people's incomes will inevitably fall behind even an anticipated level of inflation. 2. Anyone holding paper money will find its purchasing power falling each year by the rate of inflation. This includes firms and consumers who have to hold at least some paper money to facilitate buying and selling. 3. Some firms experience menu costs. Menu costs are the costs to firms of changing prices on​ products, store​ shelves, or in printed catalogs. Next Question

If the average annual rate of economic growth is 4​ percent, approximately how long will it take for the​ nation's per capita real GDP to​ double?

17.5 years

The​ world's population is growing at a rate of about

2 people per second.

Between the start of 2018 and the start of 2019​, a​ country's economic growth rate was 4 percent. Its population did not change during the​ year, nor did its price level. The rate of increase of the​ country's nominal GDP during this​ one-year interval is

4%

Unemployed

A person is considered unemployed if he or she is actively seeking​ work, but not yet working. If a person is not working and is not seeking​ work, then that person is considered not in the labor force.

Why is the unemployment​ rate, as measured by the Bureau of Labor​ Statistics, an imperfect measure of the extent of joblessness in the​ economy?

A) It fails to account for illegal activities B) it does not account for inaccurate responses to the Current Population Survey. C) Discouraged workers are not considered unemployed. D) Underemployed people are considered employed. *ALL of the above*

Even perfectly anticipated inflation imposes costs.​ Why?

A. Menu costs. B. Some wages will fail to keep up with anticipated inflation. C. Paper money loses its purchasing power by the rate of inflation. D. All of the above.

Which of these factors is a driver of economic​ growth? A. adoption of technology B. more social programs C. shorter workweeks D. None of the above.

A. adoption of technology

When the economy is at full​ employment,

A. the unemployment rate is greater than zero. B. all remaining unemployment is either frictional or structural. C. the natural rate of unemployment prevails. D. All of the above.

The BLS uses the establishment survey to collect information on employment in the economy. Indicate one drawback of the establishment survey compared to the current population survey and indicate one advantage.

Advantage- It is based on company payroll and not on unverifiable answers. Drawback- It does not include information about self-employed people. (more on page 275)

Consumer Price Index

An average of the prices of the goods and services purchased by the typical urban family of four.

Producer price index​ (PPI)

An average of the prices received by producers of goods and services at all stages of the production process. The PPI includes intermediate goods. It is often considered an early sign of inflation since increases in the prices of intermediate goods generally translate into higher prices to consumers.

Efficiency​ wage

A​ higher-than-market wage that a firm pays to increase worker productivity. By paying an efficiency wage to​ workers, the firm raises the cost of losing their jobs because most alternative jobs only pay the market wage. As a​ result, job turnover falls as do the costs associated with hiring and training new employees.

What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and​ 2010?

Both real and nominal average hourly earnings increased.

Suppose the fixed interest rate on a loan is​ 5.75% and the rate of inflation is expected to be​ 4.25%. The real interest rate is​ 1.5%. Suppose now that instead of​ 4.25%, the inflation rate unexpectedly reaches​ 5.5%. Who gains and who loses from this unanticipated​ inflation?

C. Borrowers gain from a lower real interest rate. D. Lenders lose from a lower real interest rate.

The rule of 70 provides a shorthand way to calculate the approximate number of years it will take for a​ nation's per capita real GDP to double based on the average annual percentage rate of economic growth.

Doubling time (in years) = 70/(percentage growth rate).

What is​ Costco's CEO referring​ to? (paying wages to keep employees happy)

Efficiency​ wage

To​ date, the economics profession is in complete agreement that​ growth-retarding effects of governmental and regulatory policies provides the most important explanation for slowdown of economic growth.

False

​Today's secular stagnation trend first began in Asia.

False

In the United​ States, a patent gives the inventor of a product the exclusive right to​ make, use, or sell the product for 50 years.

False -In the United​ States, a patent gives the inventor of a product the exclusive right to​ make, use, or sell the product for 20 years.

An innovation is the same thing as an invention.

False -Innovation involves the transformation of something​ new, such as an​ invention, into something that benefits the economy either by lowering production costs or by providing new goods and services.

Suppose John Q. Worker is currently unemployed. Each​ day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of​ skills, abilities, and interests. If someone asks John Q. what he does for​ work, he tells them that he is currently​ "in-between jobs." Which of the following best classifies John​ Q.'s unemployment​ status?

Frictional Unemployment

unemployment insurance payments

In the United​ States, unemployed workers are eligible for unemployment insurance payments that are equal to about half of their wage and last for six months. In other​ countries, social insurance programs pay up to 80 percent of the previous wage and last for a year or more.

Which of the following causes changes in the CPI to overstate the true inflation​ rate?

It is important that the CPI be as accurate as​ possible, but there are four biases that make changes in the CPI overstate the true inflation​ rate: 1. Substitution​ bias: Consumers tend to purchase fewer of the items that increase in price. 2. Increase in quality​ bias: Most products in the CPI increase in quality over time. 3. New product​ bias: New products are constantly entering the market. 4. Outlet​ bias: The effect of consumer purchases from outlet and discount stores.

Rate interest rate =

Nominal interest rate - inflation rate

Labor Unions

Organizations of workers that negotiate with employers for higher wages and better working conditions. Often, negotiated wages are higher than the market wage that would otherwise prevail. As a result of the​ above-market wage, employers in these industries tend to hire fewer workers.

Which of the following can give an early warning of future increases in the price​ level?

Producer price index

What effect do labor unions have on the unemployment​ rate?

Since few​ non-government workers are​ unionized, there is no significant effect on the unemployment rate.

Suppose that Sally J. Society recently lost her job as an underwater welder. In looking for a new​ job, she discovers that the only available jobs are for economists and that there are no openings for underwater welders because the trade is now obsolete. If Sally J. Society decides to return to school to earn an Economics​ degree, what is the best classification of her unemployment​ status?

Structural Unemployment

The Bureau of Labor Statistics​ (BLS) uses the Current Population Survey to

The Bureau of Labor Statistics​ (BLS) uses the Current Population Survey to collect the data needed to compute the unemployment rate.

Natural rate of unemployment

The normal rate of​ unemployment, consisting of frictional unemployment plus structural unemployment. When the economy moves through the expansionary phase of the business​ cycle, cyclical unemployment will drop to zero and the economy is said to be in full employment. That​ is, the economy is at full employment when the only remaining unemployment is either frictional or structural.

You agree to lend​ $1,000 for one year at a nominal interest rate of​ 10%. You anticipate that inflation will be​ 4% over that year. If inflation is instead​ 3% over that​ year, which of the following is​ true?

The person who borrowed the​ $1,000 will be worse off as a result of the unanticipated decrease in inflation.

Economic Growth

The rate of economic growth is the annual rate of change in per capita real GDP. This measure of the rate of growth of a​ nation's economy takes into account both its growth in overall production of goods and services and the growth rate of its population. It is an average measure that does not account for possible changes in the distribution of income or various welfare costs or benefits that may accompany growth of the economy.

Nominal interest rate

The stated interest rate on a loan.

Labor​ Force:

The sum of employed and unemployed workers in the economy.

How do unemployment insurance payments in the United States and social insurance programs in other countries increase the unemployment​ rate?

They decrease the opportunity cost of job search.

The U.S. economy creates and destroys millions of jobs each year.

This is not surprising in a vibrant market system where new firms are constantly being​ started, some existing firms are​ expanding, some existing firms are​ contracting, and some firms are going out of business. Each​ month, when the BLS announces the increases or the decreases in the number of persons employed and​ unemployed, these are net figures. That​ is, the change in the number of persons employed is equal to the number of jobs created minus the number of jobs eliminated.

According to economist Paul​ Romer, ideas are what drive economic growth.

True

According to new growth​ theory, more technological advances will occur when the rewards are greater.

True

In​ general, the more securely private property rights are​ assigned, the more capital accumulation there will be.

True

On a national​ basis, higher saving rates eventually mean higher living standards in the long​ run, all other things held constant.

True

Population growth can have both a positive and a negative impact on economic growth.

True

Indicate whether the following statement is true or false and why. ​"A wage rising slower than the rate of inflation is actually​ falling."

True. If wages are increasing slower than the average price of goods and​ services, purchasing power falls.

Structural Unemployment

Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of available jobs. Structural unemployment can last longer than frictional unemployment because workers need time to develop new skills.

Brazil has a population of about 210​ million, with about 150 million over the age of 15. Of​ these, an estimated 25​ percent, or 37.5 million​ people, are functionally illiterate. The typical literate individual reads only about two nonacademic books per​ year, which is less than half the number read by the typical literate U.S. or European resident. Answer the following questions solely from the perspective of new growth​ theory: a. Which of the following best explains the implications of​ Brazil's literacy and reading rates for its growth prospects in light of the key tenets of new growth theory. b. What types of policies might Brazil implement to improve its growth​ prospects?

a. Since the development of human capital is an important determinant of economic​ growth, Brazil's literacy and reading rates suggests its potential economic growth rate is lower. b. It should implement programs narrowly focused on promoting a higher literacy rate and broadly focused on a greater average educational attainment by its residents.

For​ modern, rich​ nations, the three stages of development​ (in order of​ occurrence) are

agriculture, manufacturing, and services

The knowledge and skills that people in the workforce acquire through​ education, on-the-job​ training, and​ self-teaching is referred to as

human capital

For every 1 percent increase in the stock of research and development in the United​ States, productivity in the rest of the world

increases by about 0.25 percent.

If firms pay what are called​ "efficiency wages", they pay wages that

motivate workers to increase their productivity.

The World Bank estimates that​ _______ of the​ world's people live on less than​ $2.00 per day.

nearly 10 percent

A​ nation's capital goods wear out over​ time, so a portion of its capital goods become unusable every year. Last​ year, its residents decided to produce no capital goods. It has experienced no growth in its population or in the amounts of other productive resources during the past year. In​ addition, the​ nation's technology and resource productivity have remained unchanged during the past year. The​ nation's economic growth rate for the current year will be

negative

per capita real GDP for n

per capita real GDP in n-1 x Annual growth rate between n-1 and n

Total capital is the sum of

physical capital and human capital

per capita real GDP

real GDP divided by the population

When compared to the Great​ Depression, the typical length of unemployment in the modern​ (post-Great Depression-era) U.S. economy is

relatively brief.

There are predictions that computers may become as powerful as the human brain by 2030.

true

All of the following are benefits of economic growth except

urban congestion.

Expenditures are calculated

using​ current-year prices and​ base-year quantities. Add expenditures to calculate total expenditure.

A​ nation's capital goods wear out over​ time, so a portion of its capital goods become unusable every year. Last​ year, its residents decided to produce no capital goods. It has experienced no growth in its population or in the amounts of other productive resources during the past year. In​ addition, the​ nation's technology and resource productivity have remained unchanged during the past year.​ Now, suppose that educational improvements during the past year enable the people of this nation to repair all capital goods so that they continue to function as well as new. All other factors are​ unchanged, however. In light of this single change to the conditions faced in this​ nation, this​ nation's economic growth rate for the current year will be

zero

Real Average Hourly Wages (i)

{(Nominal Average Hourly Wage(i))/ (CPI(i))} x 100

unemployment rate

{(Number of unemployed)/ (Labor force)} x 100 = Unemployment rate.

Consumer Price Index eq

{(cost of the market basket in the current year)/ (Cost of the market basket in the base year)} x 100

labor force participation rate is

{(labor force)/ (Working - age population)} x 100 = Labor force participation rate

Frictional Unemployment

​Short-term unemployment that arises from the process of matching workers with jobs. Frictional unemployment is​ short-term unemployment that arises from the process of looking for a job. The process takes​ time, so there will always be some workers who are frictionally unemployed because they are between jobs and in the process of finding new ones.