Macro econ chapter 11
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 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?)
1974 to 1995. The growth rate of real GDP per capita would be higher than the growth rate of real GDP per hour.
An article in the Wall Street Journal observes: "For 2008, productivity grew an astounding 2.8% from 2007 even as the economy suffered through its worst recession in decades." Source: Brian Blackstone, "Productivity Proves Resilient," Wall Street Journal, April 29, 2009. How is it possible for labor productivitylong dash—output per hour workedlong dash—to increase if outputlong dash—real GDPlong dash—is falling?
A. Business record-keeping is now faster and more accurate due to computer technology. B. Laptop computers and wireless Internet allow people to work while they are away from their jobs. C. Faster and less expensive computers have made communication and data processing faster and easier. D. The "new economy" is based on information technology.
In a speech in 2009, President Barack Obama made the following observations: "I know that for many, the face of globalization is contradictory...Trade can bring new wealth and opportunities, but also huge disruptions and change in communities." Source: "Obama's Speech in Cairo," Wall Street Journal, June 4, 2009. How does trade bring "new wealth and opportunities"?
A. Countries that are more open to foreign trade and investment are more likely to receive foreign direct investment (FDI). B. Countries that are more open to foreign trade and investment are more likely to receive foreign portfolio investment.
Indicate which of the following is an explanation for the productivity slowdown of 1973-1994.
A. Deterioration of the U.S. educational system B. Increased production and transportation costs C. A shift from a goods-based economy to a service-based economy
In discussing the future of China, the Economist observed: And there are...clear limits to the march of freedom in China; although personal and economic freedoms have multiplied, political freedoms have been disappointingly constrained since Hu Jintao became president in 2003. Source: "China's Dash for Freedom," Economist, July 31, 2008. Why are the limits on political freedom likely to become an obstacle to China's continued economic growth?
A. Entrepreneurs will not feel secure enough to bring together the factors of production. B. Failure to establish the rule of law. C. Lack of consistent enforcement of property rights.
In discussing the future of China, the Economist observed: And there are...clear limits to the march of freedom in China; although personal and economic freedoms have multiplied, political freedoms have been disappointingly constrained since Hu Jintao became president in 2003. Source: "China's Dash for Freedom," Economist, July 31, 2008. Why are the limits on political freedom likely to become an obstacle to China's continued economic growth?
A. Failure to establish the rule of law. B. Lack of consistent enforcement of property rights. C. Entrepreneurs will not feel secure enough to bring together the factors of production
An article in the Wall Street Journal observes: "For 2008, productivity grew an astounding 2.8% from 2007 even as the economy suffered through its worst recession in decades." Source: Brian Blackstone, "Productivity Proves Resilient," Wall Street Journal, April 29, 2009. How is it possible for labor productivitylong dash—output per hour workedlong dash—to increase if outputlong dash—real GDPlong dash—is falling?
A. Faster and less expensive computers have made communication and data processing faster and easier. B. The "new economy" is based on information technology. C. Business record-keeping is now faster and more accurate due to computer technology. D. Laptop computers and wireless Internet allow people to work while they are away from their jobs.
Prior to 1750 and the onset of Industrial Revolution, very little economic growth occurred in the world. What marks the beginning of the Industrial Revolution?
Adding mechanical power to the production process increased the quantity of goods each worker could produce.
The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic growth, the economic growth model focuses on the causes of increases in long-run labor productivity. What are the key factors that determine labor productivity? (Mark all that apply.)
C. Technological change D. Quantity of capital per hour worked
Suppose two countries, Country A and Country B, have a similar real GDP per capita. Country A has an average economic growth rate of 2% and Country B has an average economic growth rate of 3.3%. In the long run, what can we predict about living standards in the two countries?
Country B's living standards will increase much more rapidly in the long run.
Globalization entails all of the following except: Developing countries have benefited from globalization, because globalization can do all of the following except
Cultural exchange between nations. impose trade barriers and tariffs on imported goods so as to protect domestic industries.
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. Which one of the following does not explain the slowdown in productivity growth from the mid-1970s to the mid-1990s? All of the following contributed to an increase in productivity growth from 1996 to the present except an
GDP per capita fell rapidly between 1900 and 1950. Workers lacked incentives to work hard as their job security was at its lowest. improvement in workers' skills due to better education and training.
Which of the following is a way in which governments can increase productivity through health and education?
Governments can promote vaccinations for children and improve access to clean water.
The figure in the window on the right shows average annual growth rates in real GDP per hour worked in the United States. Based on the data from the figure on the right which one of the following statements is false?
If the growth rate of real GDP per hour worked had continued to grow from 1973 to 1994 at the same rate it had been growing from 1950 to 1972, it would have been higher than it actually was.
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.
An opinion column in the Economist argued, "Globalization LOADING... , far from being the greatest cause of poverty, is its only feasible cure." Source: Clive Crook, "Globalisation and Its Critics," Economist, September 27, 2001. Globalization reduces poverty by all of the following except:
Installing high tariff barriers.
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 high -income countries are concerned with certain consequences of rapid economic growth, such as deforestationdeforestation.
Consider the figure to the right. Which of the following is responsible for the upward shifts in the per-worker production function?
Technological change
Upper A reform of the Chinese school system results in more highlyA reform of the Chinese school system results in more highly trained workers.trained workers.
This will cause a shift of China's per-worker production function. LOADING...
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.
This Making the Connection argues that a key difference between market economies and centrally planned economies, like the former Soviet Union, is that "In market economies, decisions about which investments to make and which technologies to adopt are made by entrepreneurs and managers with their own money on the line. In the Soviet system, these decisions were usually made by salaried bureaucrats trying to fulfill a plan formulated in Moscow." But in large corporations, investment decisions are often made by salaried managers who do not, in fact, have their own money on the line. These managers are spending the money of the firm's shareholders rather than their own money. The investment decisions of salaried managers in the United States tend to be better for the long-term growth of the economy than were the decisions of salaried bureaucrats in the Soviet Union because:
U.S. managers are driven by incentives of higher profits, leading them to adopt new technologies.
The figure above shows the levels of GDP per capita around the world in 2006. GDP is measured in U.S. dollars, corrected for differences across countries in the cost of living. Use the figure to help indentify which one of the following statements is true:
Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.
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 .
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 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 consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita. b. For the range of initial Real GDP per capita from 0 to Real GDP per capita1, the figure does 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 a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita. c. For the range of initial Real GDP per capita11 to Real GDP per capita2, the figure does 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 a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
According to a study by an economist at the Federal Reserve Bank of Minneapolis, during the middle 1980s, managers at iron mines in Canada and the United States increased output per hour worked by 100 percent through changes in work rules that increased workers' effort per hour worked and increased the efficiency of workers' effort. Source: James A. Schmitz, Jr., "What Determines Labor Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron-Ore Industries Following Their Early 1980s Crisis," Federal Reserve Bank of Minneapolis Research Department Staff Report 286, February 2005. This increase in output per hour worked is due to
better means of organizing and managing production
Some economists believe that the higher productivity growth rates that began in the mid-1990s
can be sustained by innovations in information and communications technology.
Most of the poor countries experience slow growth because of all the following reasons except
excellent public health and education.
The new growth theory states that The new growth theory differs from the growth theory developed by Robert Solow, since
firms will add to an economy's stock of knowledge capital by engaging in research and development or by contributing to technological change. the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.
The government policy that does not increase economic growth is
foreign trade policy that favors imposing a high tariff on imported high-tech goods.
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 Integration into the global economy has
globalization and more integration of trade. 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.
It is easier for the typical developing country to
improve the state of public health
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.
Firms are likely to underinvest in research and development, which slows the accumulation of knowledge capital, slowing economic growth, because Government policy can increase the accumulation of knowledge capital in all the following ways except by:
knowledge capital is both nonrival and nonexcludable; other firms can freely access the research and development of one particular firm. investing in capital accumulation.
The economic growth model predicts that the Have poor countries been catching up to rich countries?
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. There has been catch-up by some poor but industrialized countries.
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 A free press could help reduce corruption, which would then promote growth, by all of the following except:
property rights and the rule of law and controlling corruption. Publishing gossip columns about a politician's personal matter.
Economic growth will Some economies are able to maintain high growth rates despite diminishing returns to capital by using
slow down or stop if more capital per hour is used because of diminishing returns to capital. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns.
Compared to the period between 1950 and 1972, the productivity of U.S workers between 1973 and 1994
slowed by more than one percentage point per year.
The labor markets in the United States have greater flexibility and the financial system in the United States has greater efficiency than other higher-income countries, such as those in Europe, because in This greater flexibility in labor markets and greater efficiency in financial markets
the United States, labor markets have less government regulations so workers have job mobility to better match their skills with jobs and the financial markets provide better legal protection and liquidity to investors. lead to increases in productivity that contribute to rapid growth in real GDP per capita for the United States.
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.
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 near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt The elimination of measles and childhood deaths from diarrhea will
the standard of living for these low-income countries increased significantly. did not increase real GDP per capita, but increased productivity and human capital resulting in a higher standard of living. remove a major impediment to growth, increase productivity and should eventually lead to increases in real GDP per capita.
Consider the per-worker production function graph on the right. If there is an increase in capital per hour worked, holding technology constant, then If there is an increase in technology, holding constant the quantity of capital per hour worked, then
there is a movement from A to B. there is a movement from A to C.
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.
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? If the Roman Empire had been able to bring about sustained economic growth, it is likely that the standard of living today would
wars and revolutions. be substantially higher
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 As these countries become able to increase their standards of living, there
will have a healthier and more productive labor force as there is significant improvment in health, education, and civil and political liberties. will be economic growth but in order to have sustainable growth, these countries need their incomes to increase.
The lower birthrate in China China has experienced
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. 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.
The relationship that Raymond Fisman and Edward Miguel found between the extent of corruption in a country and the number of parking violations committed by the country's United Nations delegates in New York isn't perfect. For example, "Ecuador and Colombia both have perfectly clean parking slates, despite the experts' view of them as fairly corrupt places." Source: Raymond Fisman and Edward Miguel, Economic Gangsters, Princeton, NJ: Princeton University Press, 2009, p. 89. Does this observation invalidate Fisman and Miguel's conclusions about whether the parking violations data provide evidence in favor of there being a culture of corruption in some countries?
No, because their conclusions are generalized and may not apply to every country.
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.