ECON131 Chapter 7: Economic Growth

Gerald can produce 128 toothpicks in an eight-hour workday. What is Gerald's labor productivity?

16 toothpicks per hour (The equation is Labor productivity = 128:8, or Labor Productivity = 16:1)

If an economy's GDP will double in 25 years, then its growth rate must be about . . .

2.8%

Assume the U.S. economy increased about 1.1% quarter to quarter. What is the annualized percent change in real GDP?

4.4%

Assume the initial value of an investment is $1,000 and the growth rate is 15%. Using the Rule of 70, how many years will it take for the initial value to double?

4.7 years

Infrastructure

The public capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible resources such as protection of property rights and a stable monetary environment

Labor Productivity

The ratio of the output of goods and services to the labor hours devoted to the production of that output

Real GDP

The total value of final goods and services produced in a country in a year measured using prices in a base year

In September 2010, President Obama talked about a plan to spend more on U.S. infrastructure. What would be included in such a plan?

investments that provide broadband access to rural areas, improving interstate highways, and investing in a smart electrical grid

A production function shows . . .

the output that is produced using different combinations of inputs combined with existing technology.

The annualized rate of change is . . .

the quarter rate multiplied by 4.

If a country's population increases at a higher rate than the growth in its real GDP . . .

the standard of living in the country has declined.

According to Joseph Schumpeter, what is the driving force behind business cycles?

waves of innovations

Production Function

Measures the output that is produced using various combinations of inputs and a fixed level of technology

Short-run growth is common when . . .

obstacles preventing resources from being fully used are removed.

If the Bureau of Economic Analysis reports that the annualized U.S. growth rate was 2.5% for the second quarter, then the actual growth rate from the first quarter to the second quarter was . . .

0.625%

The annualized percent change in real GDP is 3.2%. What is the quarter-to-quarter percent change in real GDP upon which this annualized rate was calculated?

0.8%

Using the Rule of 70, assume it takes seven years for the initial value to double. What is the growth rate?

10%

Diminishing Returns to Capital

Each additional unit of capital provides a smaller increase in output than the previous unit of capital

The classical form of the production function states that . . .

Output = f(L, K) (L=Labor, K=Capital)

Economic Growth

Usually measured by the annual percentage change in real GDP, reflecting an improvement in the standard of living

Catch-Up Effect

Countries with smaller starting levels of capital experience larger benefits from increased capital, allowing these countries to grow faster than countries with abundant capital

Productivity

How effectively inputs are converted into outputs. Higher productivity and higher living standards are closely related

Investment in Human Capital

Improvements to the labor force from investments in skills, knowledge, and the overall quality of workers and their productivity

Rule of 70

Provides an estimate of the number of years for a value to double, and is calculated as 70 divided by the annual growth rate

Real GDP per Capita

Real GDP divided by population, provides a rough estimate of a country's standard of living

Compounding

The ability of growth to build on previous growth. It allows a value such as GDP to increase significantly over time as income increases on top of previous increases in income

Capital-to-Labor Ratio

The capital employed per worker. A higher ratio means higher labor productivity and, as a result, higher wages.

Total Factor Productivity

The portion of output produced that is not explained by the number of inputs used in production

In April 2010, the New York Times reported on an analysis of census data showing that more immigrants to the United States were high-skilled workers working in white-collar jobs than were low-skilled workers working in low-wage jobs. What statements best describes the likely impact of this on U.S. economic growth?

This is good for economic growth because not only are there more workers, but these workers will also be more productive.

According to Malthus, a fixed quantity of land and a growing human population will eventually produce . . .

a stationary state in which growth will cease.

What is NOT generally viewed by economists as critical to economic growth?

access to large amounts of natural resources

Developing countries can achieve higher productivity per unit of capital because they can use technologies developed by other countries. This is known as the . . .

catch-up effect.

The fourth looping machine adds 20 units of output to total production. When the fifth looping machine is added to the production line, total output increases by 19 units. Which of the following has occurred?

diminishing returns to capital

The government decides to subsidize the development of a new communications network. It is acting in its role to promote economic growth by . . .

enhancing physical and human capital.

The ability to use physical resources in creative ways to produce goods and services is known as . . .

entrepreneurial ability, technology, and ideas.

According to the classical model, what development does NOT contribute to economic growth?

higher interest rate

In September 2010, President Obama talked about a plan to spend more on U.S. infrastructure. What would NOT be included in such a plan?

human capital improvements through on-the-job training

Economic growth results from . . .

increases in the labor force and its productivity, increases in capital, and improvements in technology.

Developed nations tend to have . . .

limited labor supplies but lots of capital.

Creating a new technology that makes production line workers more efficient is likely to produce . . .

long-run growth.

Patents protect . . .

ownership of an invention.

The relationship between economic freedom and per capita GDP is . . .

positive

Over the past century, when worker productivity rose . . .

real wages rose.

Government spending on _____ is considered a contribution to technology.

research grants

The recent global financial instability . . .

slowed down economic growth, harmed standards of living, and caused severe credit crunches.

What is the primary explanation for the rapid growth of the U.S. economy over the last century?

technological progress

What is an example of the primary explanation for the extraordinary economic growth the United States has enjoyed over the past century?

the development of the Internet

Long-run growth occurs . . .

when an economy finds ways to use existing resources better.