Macroeconomics Chapter 20 Review Questions

Use an example to explain why, after periods of rapid growth, a low-income country that has not caught up to a high-income country may feel poor.

A good way to think about this is how a runner who has fallen behind in a race feels psychologically and physically as he catches up. Playing catch-up can be more taxing than maintaining one's position at the head of the pack.

Why is investing in girls' education beneficial for growth?

A more educated populace is more productive, meaning that they can produce more, earn more and consume more, which are all good for growth.

What is an aggregate production function?

An aggregate production function describes the output of an entire economy based on various inputs such as capital, labor and technology.

How do gains in labor productivity lead to gains in GDP per capita?

As workers produce more, their wages will rise and they will have more disposable income for consumption, leading to a rise in GDP per capita.

What do the growth accounting studies conclude are the determinants of growth? Which is more important, the determinants or how they are combined?

Capital deepening (increases in physical capital per worker and human capital per worker) better technology leads to growth. Better technology appears to account for about half the growth that occurs.

What is capital deepening?

Capital deepening is when capital is increasing relative to the number of workers, which allows workers to become more productive.

Would you expect capital deepening to result in diminished returns? Why or why not? Would you expect improvements in technology to result in diminished returns? Why or why not?

Capital deepening, by definition, should lead to diminished returns because you're investing more and more but using the same methods of production, leading to the marginal productivity declining. This is shown on a production function as a movement along the curve. Improvements in technology should not lead to diminished returns because you are finding new and more efficient ways of using the same amount of capital. This can be illustrated as a shift upward of the production function curve.

List some arguments for and against the likelihood of convergence.

Convergence is likely to happen because of the diminishing marginal returns of education. Enacting basic reforms can lead to huge bursts of growth for developing countries, but an already developed country will have picked the low-hanging fruit already and have a more difficult time of achieving rapid growth. On the other hand, convergence has only been witnessed to a limited degree in the real world, and there is a case to be made that the factors that make a country poor or rich are more innate than simply a product of changes in public policy. Additionally, continued technological innovations can prevent diminishing marginal returns from occurring which also prevents convergence from happening.

What sorts of policies can governments implement to encourage convergence?

Developing countries should enact reforms that rapidly spur growth, such as better protections for private property and the transition from agriculture to industry.

What policies can the government of a free-market economy implement to stimulate economic growth?

Enforce property rights, provide public education, have low taxes, fund infrastructure projects, etc.

For a high-income economy like the United States, what elements of the aggregate production function are most important in bringing about growth in GDP per capita? What about a middle-income country such as Brazil? A low-income country such as Niger?

High-income countries generally benefit most from growth in human capital, whereas middle- and lower-income countries benefit more from physical capital, since a little mechanization can go a long way for countries that are still developing.

As technological change makes us more sedentary and food costs increase, obesity is likely. What factors do you think may limit obesity?

Human capital and capital deepening may limit obesity.

Assume there are two countries: South Korea and the United States. South Korea grows at 4% and the United States grows at 1%. For the sake of simplicity, assume they both start from the same fictional income level, $10,000. What will the incomes of the United States and South Korea be in 20 years? By how many multiples will each country's income grow in 20 years?

In 20 years the United States will have an income of 10,000 x (1 + 0.01)20 = $12,201.90 The United States has grown by a multiple of 1.2. South Korea will have an income of 10,000 x (1 +.04)20 = $21,911.23 South Korea has grown by a multiple of 2.1.

Labor Productivity and Economic Growth outlined the logic of how increased productivity is associated with increased wages. Detail a situation where this is not the case and explain why it is not.

In cases where increased productivity reduces the skill required to perform a task, the market for workers in a particular industry can suddenly see a vast increase in supply, which leads to lower wages due to more competition.

Education seems to be important for human capital deepening. As people become better educated and more knowledgeable, are there limits to how much additional benefit more education can provide? Why or why not?

In the short run, there are certainly limits to the productivity gains made from education, but in the long run as human knowledge improves, these limits may become less pronounced.

Change in labor productivity is one of the most watched international statistics of growth. Visit the St. Louis Federal Reserve website and find the data section. Find international comparisons of labor productivity, listed under the FRED Economic database (Growth Rate of Total Labor Productivity), and compare two countries in the recent past. State what you think the reasons for differences in labor productivity could be.

N/A

Refer back to the Work It Out about Comparing the Economies of Two Countries and examine the data for the two countries you chose. How are they similar? How are they different?

N/A

What do economies mean when they refer to improvements in technology?

New machines or techniques that improve the productivity of labor, or that can be substituted for labor.

How much should a nation be concerned if its rate of economic growth is just 2% slower than other nations?

Over the long run, a 2% difference in economic growth rates can be extremely significant, so the nation should be reasonably concerned about this.

Why does productivity growth in high-income economies not slow down as it runs into diminishing returns from additional investments in physical capital and human capital? Does this show one area where the theory of diminishing returns fails to apply? Why or why not?

Productivity growth from new advances in technology will not slow because the new methods of production will be adopted relatively quickly and easily, at very low marginal cost. Also, countries that are seeing technology growth usually have a vast and powerful set of institutions for training workers and building better machines, which allows the maximum amount of people to benefit from the new technology. These factors have the added effect of making additional technological advances even easier for these countries.

Explain the difference between property rights and contractual rights. Why do they matter to economic growth?

Property rights are the rights of individuals and firms to own property and use it as they see fit. Contractual rights are based on property rights and allow individuals to enter into agreements with others regarding the use of their property, providing recourse through the legal system in the event of noncompliance. Economic growth occurs when output is increasing, and incomes are rising growth occurs when output is increasing, and incomes are rising.

List the areas where government policy can help economic growth.

Public education (loans scholarships and aid), health, infrastructure, low investment taxes, funding for infrastructure projects, special economic zones, rule of law, etc.

Over the past 50 years, many countries have experienced an annual growth rate in real GDP per capita greater than that of the United States. Some examples are China, Japan, South Korea, and Taiwan. Does that mean the United States is regressing relative to other countries? Does that mean these countries will eventually overtake the United States in terms of the growth rate of real GDP per capita? Explain.

Some models show that as a country industrializes, it experiences very high rates of growth that eventually flatten out. In all probability, these countries are simply catching up to the U.S. and will see their growth rates decline as they fully industrialize.

How is the concept of technology, as defined with the aggregate production function, different from our everyday use of the word?

Technology within the aggregate production function refers to all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products.

Explain what the Industrial Revolution was and where it began.

The Industrial Revolution refers to the widespread use of power-driven machinery and the economic and social changes that resulted in the first half of the 1800s. The Industrial Revolution began in Great Britain.

What are the "advantages of backwardness" for economic growth?

The advantages of backwardness include faster growth rates because of the process of convergence, as well as the ability to adopt new technologies that were developed first in the "leader" countries.

How did the Industrial Revolution increase the economic growth rate and income levels in the United States?

The advent of mass production allowed laborers a greater degree of specialization, which increased efficiency and the gains from trade.

How is GDP per capita calculated differently from labor productivity?

The amount a worker can produce and that worker's income are not always exactly equal, so these numbers may differ.

Describe some of the political and social tradeoffs that might occur when a less developed country adopts a strategy to promote labor force participation and economic growth via investment in girls' education.

There could be many various ramifications depending on the situation, but for less developed countries one possibility is the difficulty in managing household and raising children in an environment where both sexes are working. There are also social norms and prejudice to be overcome that could make such a strategy less effective than it might otherwise be.

Are there other ways in which we can measure productivity besides the amount produced per hour of work?

Yes. Productivity is output per unit of input, so we can measure productivity using GDP (output) per worker (input).

Would the following events usually lead to capital deepening? Why or why not? a. A weak economy in which businesses become reluctant to make long-term investments in physical capital. b. A rise in international trade. c. A trend in which many more adults participate in continuing education courses through their employers and at colleges and universities.

a. No. Capital deepening refers to an increase in the amount of capital per person in an economy. A decrease in investment by firms will actually cause the opposite of capital deepening (since the population will grow overtime). b. There is no direct connection between an increase in international trade and capital deepening. One could imagine particular scenarios where trade could lead to capital deepening (for example, if international capital inflows—which are the counterpart to increasing the trade deficit—lead to an increase in physical capital investment), but in general, no. c. Yes. Capital deepening refers to an increase in either physical capital or human capital per person. Continuing education or any time of lifelong learning adds to human capital and thus creates capital deepening.