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.