Chapter 11

Why do economic growth rates​ matter? A. High growth rates coincide with improved living standards. B. When a country sustains high growth​ rates, life expectancy at birth increases. C. High levels of sustained economic growth reduce infant mortality. D. All of the above. E. A and C only.

D

The Industrial Revolution and its subsequent spread throughout the world resulted in sustained __________ in real G D P per capita.

increases

•Allowing firms to benefit from their own research and development __________ their incentive to perform it.

increases

The average annual growth rate is the average rate of growth in GDP ______________ between 2007 and​ 2019, and the total percentage increase in real GDP is the ____________ .

rate at which GDP must grow on average each year and percentage increase in real GDP between the two years 2007 and 2019

Schumpeter developed a model of growth emphasizing his view that new products unleashed a

•"gale of creative destruction."

Economists point to four key factors in explaining why many low-income countries are growing so slowly:

•Failure to enforce the rule of law •Wars and revolutions •Poor public education and health •Low rates of saving and investment

Arguments against growth might include:

•Negative effects on the environment •Depletion of natural resources •Diminishment of distinctive cultures

The public good nature of knowledge capital leads to a role for government policy in:

•Protecting intellectual property with patents and copyrights •Subsidizing research and development •Subsidizing education

The economic growth model predicts that poor countries will grow faster than rich countries. This is because:

•he effect of additional capital is greater for countries with smaller capital stocks •There are greater advances in technology immediately available to poorer countries

Three Main Sources of Technological Change

1. Better machinery and equipment 2. Increases in human capital 3. Better means of organizing and managing production

By now, we can summarize the types of policies that are essential to fostering economic growth:

1. Enhancing property rights and the rule of law 2. Improving health and education 3. Policies that promote technological change 4. Policies that promote savings and investment

Two main factors affect labor productivity

1. The quantity of capital per hour worked 2. The level of technology

Briefly explain how a poor country might benefit from foreign portfolio investment or foreign direct investment. A. It can give​ low-income countries access to technology and funds that otherwise would not be available. B. Households will be able to save less and spend​ more, thus providing firms with the funds necessary for investment. C. It can enable poor countries to become more independent and therefore less dependent on the global economy D. The gains are often captured by the powerful elite to be equitably distributed to households in the bottom quintiles.

A

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. A. GDP per capita fell rapidly between 1900 and 1950. B. Growth of per capita real GDP slowed down considerably between 1974 and 1995. C. Productivity growth since 2006 has fallen to an even lower rate than during the period of slow growth from the​ mid-1970s to the​ mid-1990s. D. There was a rapid rise in the growth rate of per capita GDP between 1950 and 1973.

A

Have poor countries been catching up to rich​ countries? A. There has been​ catch-up by some poor but industrialized countries. B. The rich countries are getting poorer and going down to the level of poor countries. C. There has been no​ catch-up by any of the poor countries. D. There has been​ catch-up among all poor countries.

A

Productivity growth rates matter because A. productivity growth rates have a big impact on future economic growth. B. if the labor force is highly productive then it will lead to a resurgence of unions. C. China relies upon high U.S. productivity growth rates to outsource more American jobs. D. the level of growth is a reliable predictor of Democrat or Republican control of Congress.

A

Some economies are able to maintain high growth rates despite diminishing returns to capital by using A. better or enhanced​ technology, along with accumulating​ capital; these economies are growing because​ technology, unlike​ capital, is subject to increasing returns. B. a larger proportion of​ capital, thereby making their production capital​ intensive, so the sheer volume of capital protects them from diminishing returns to capital. C. a newer production method​ that, if used​ properly, produces increasing returns to capital. D. a​ labor-intensive technology because​ labor, unlike​ capital, is not subject to diminishing returns.

A

Technological change is more important to​ long-run economic growth than changes in capital. The easiest way for firms to gain access to new technology is through A. foreign direct investment. B. health and education. C. savings and investment. D. wars and civil strife.

A

The economic growth model predicts that the A. 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. B. level of per capita GDP in poor countries will decrease over time and the poor nations will not be able to catch up with the rich nations. C. rich countries will have stagnant growth and will catch up with the poor​ countries, so that there will be a convergence toward a​ "poverty trap." D. level of per capita GDP in rich countries will increase so fast that it will be difficult for poor countries with low income per capita to ever catch up with the rich countries.

A

The government policy that does not increase economic growth is A. foreign trade policy that favors imposing a high tariff on imported​ high-tech goods. B. incentives to firms in the form of investment tax credits that can take the economy out of a low​ saving-investment trap. C. better health and education policies that provide free childhood​ vaccination, water​ purification, and​ K-12 public education. D. policy concerning property rights and rules of law that can free the country from corruption and political instability.

A

​Healthier, more educated workers tend to be more productive. Greater overall productivity per hour worked is a fundamental component of​ long-term economic growth.​ However, many very successful individuals often find few opportunities in their own developing​ countries, and leave them for industrial countries. By improving health and​ education, developing countries can generate economic​ growth, and increase incomes. This will help combat the prevalence of educated people leaving their home countries for opportunities elsewhere. That​ is, it will combat A. the brain drain. B. communism. C. political reform. D. corruption.

A

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? A. When Eli Whitney invented the cotton​ gin, textile production increased​ world-wide. B. Adding mechanical power to the production process increased the quantity of goods each worker could produce. C. The​ newly-discovered spice trade routes opened up new markets for goods and increased demand for them. D. The smelting of iron ore increased the use of​ durable, metal tools which made farming more productive.

B

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.) A. Trade B. Quantity of capital per hour worked C. Efficiency wages D. Technological change

BD

Define​ "creative destruction." A. It refers to when firms imitate or copy another​ firm's technology, thereby limiting creativity and innovation. B. It refers to an extended period of slow growth in an economy. C. It refers to the process of new technologies advancing living standards while destroying many existing firms. D. It is when governments enact regulations that severely limit or even restrict innovation in an economy.

C

Economic growth will A. not be sustained if developing countries stop accumulating capital because of diminishing returns to capital. B. be faster if more capital per hour is used because of increasing returns to capital. C. slow down or stop if more capital per hour is used because of diminishing returns to capital. D. not be affected because the key to economic growth is capital accumulation whether there are diminishing returns or not.

C

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? A. Growth rates are not related to living standards. B. Country​ A's living standards will increase much more rapidly in the long run. C. Country​ B's living standards will increase much more rapidly in the long run. D. The countries will experience similar increases in their living standards.

C

The image is a world map that shows the GDP per capita of different countries in 2016. The image has a box with four labels: Greater than $20,000, Between $10,000 and $20,000, Between $2,500 and $10,000, and Less than $2,500. Australia, New Zealand, the United States, Canada, Japan, Singapore, South Korea, Argentina, the United Kingdom, Greenland, and Taiwan have a per capita GDP greater than $20,000. Most of the countries of Western Europe and Northern Asia also have a per capita GDP greater than $20,000. Most of the countries of Latin America and Southern Asia have a per capita GDP between $10,000 and $20,000. Some countries like India, Pakistan, Sri Lanka, and a few countries of Southern Africa and Latin America have a per capita GDP between $2,500 and $10,000. Most of the countries of Africa have a per capita GDP less than $2,500. GDP per​ Capita, 2018 Using GDP per capita in 2018​ (measured in U.S.​ dollars, corrected for differences across countries in the cost of​ living), identify which one of the following statements is​ true: A. Most of the countries of​ Africa, Asia, and Latin America are​ high-income countries. B. East Asian countries such as​ Singapore, South​ Korea, and​ Taiwan, are very low income countries. C. Western​ Europe, Australia,​ Canada, Japan, New​ Zealand, and the United States are​ high-income countries. D. All of the above are true.

C

What can​ low-income countries do in order to increase the amount of loanable funds available to firms for investment projects such as new factories or improved​ technology? A. Print more money B. Increase the interest rate on borrowing C. Provide savings incentives D. All of the above

C

act similarly for creative works like books and films, granting the exclusive right to use the creation during and 70 years after the creator's lifetime.

Copyrights

Compared to the period between 1950 and​ 1973, the productivity of U.S workers between 1974 and 1995 A. grew by about the same amount per year. B. increased by more than one percentage point per year. C. increased by less than one percentage point per year. D. slowed by more than one percentage point per year.

D

Indicate which of the following is an explanation for the productivity slowdown of​ 1974-1995. A. Deterioration of the U.S. educational system B. A shift from a​ goods-based economy to a​ service-based economy C. Increased production and transportation costs D. All of the above

D

New growth theoryLOADING... suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge​ capital? A. Patents B. Public education C. Subsidies D. All of the above E. A and B only

D

Strong​ rule-of-law countries grow more rapidly than weak​ rule-of-law countries. What factor will most likely improve economic growth in weak​ rule-of-law countries? A. Capitalism B. Communism C. Corruption D. Political reform

D

When creative destruction​ occurs, A. no new products or technologies are​ created, and the lack of innovation will ultimately decrease the growth rate of the economy in the long run. B. it creates new opportunities for some firms but drives others out of the​ market, and due to the equalizing effect of these two​ events, economic growth will remain constant. C. older products—​and, ​often, the firms that produced them—are driven out of the​ market, which decreases consumer optimism and ultimately decreases economic growth. D. new products and new technologies may be created that improve worker​ productivity, ultimately increasing the growth rate of the economy in the long

D

__________________ explains growth rates in real G D P per capita over the long run.

Economic growth model

A firm's purchasing or building of a facility in a foreign country.

Foreign direct investment (F D I)

The purchase by an individual or a firm of stocks or bonds issued in another country.

Foreign portfolio investment

Significant economic growth did not really begin until the

Industrial Revolution

the application of mechanical power to the production of goods, beginning in England around 1750.

Industrial Revolution

is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences.

human capital

the prediction that the level of G D P per capita (or income per capita) in poor countries will grow faster than in rich countries.

catch up

smaller incremental increases in output.

diminishing returns

The experience of the United States can help us to understand how capital accumulation and technological change help to drive

economic growth

To Schumpeter, the _________ is central to economic growth, and the profits of entrepreneurs provide the incentive for bringing together the factors of production—labor, capital, and natural resources—in new ways.

entrepreneur

•Solow did not seek to ___________ technological change, instead treating it as the result of chance scientific discoveries.

explain

What is the difference between foreign portfolio investment and foreign direct​ investment? When a firm builds or purchases a facility in a foreign​ country, ____________ occurs. When an individual or a firm buys stocks or bonds issued in another​ country, _________________ occurs

foreign direct invesment foreign portfolio investment

Public goods such as knowledge capital generation result in

free riding

benefitting from goods and services you do not pay for.

free riding

•the process of countries becoming more open to foreign trade and investment.

globalization

Once this is done, governments can encourage savings and investment through tax incentives, like tax-advantaged savings plans, or

investment tax credits.

first developed by Toyota; this involves assembling goods from parts that arrive at the factory exactly when they are needed.

just-in-time system

Romer argues that the accumulation of __________is a key determinant of economic growth.

knowledge capital

the quantity of goods and services that can be produced by one worker or by one hour of work.

labor productivity

Small differences in economic growth rates result in big long-term differences in __________ standards.

living

A country that grows too slowly fails to raise _________

living standards

The use of mechanical power allowed England and other countries—like the United States, France, and Germany—to begin to experience ____________

long-run economic growth

Paul Romer developed the

new growth theory

a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

new growth theory

The 1980s and 1990s have seen some countries progress out of the developing category, like Singapore, South Korea, and Taiwan; these are often referred to as

newly industrializing countries

are the exclusive right to produce a product for a period of 20 years from the date the __________ application is filed with the government. This period of time is designed to balance the chance for a firm to benefit from its invention against the need of society to benefit from it.

patent

Governments seek to protect intellectual property through the use of

patents and copyrights.

: the relationship between real G D P per hour worked and capital per hour worked, holding the level of technology constant.

per-worker production function

In the long run, a country will experience an increasing standard of living only if it experiences continuing

technological change

So our model will concentrate on changes in the quantity of capital and ____________

technological change

positive or negative change in the ability of a firm to produce a given level of output a given quantity of inputs.

technological change