Chapter 7

Last year, real GDP in an imaginary economy was $125 billion and the population was 5 million. This year, real GDP is $132 billion and the population was 5.2 million. What was the growth rate of real GDP per person during the year?

1.54% (125/5=25,000 132/5.2=25,384. So, 25,384(this year)-25,000(previous year)/25,000(previous year) *100= 1.536=1.54)

An orchard employs 10 workers, each working eight hours, to produce 160 boxes of apples. What is orchard's productivity?

2 boxes per worker hour. Feedback: Productivity at the orchard is 160 boxes / 10 workers / 8 hours = 2 boxes per worker hour.

The short-run effects of an increase in the saving rate include a higher growth rate of productivity and a lower growth rate of income. True False

False

The traditional view of the production process is that capital is subject to constant returns. True False

False

When China experiences investment from abroad, productivity rises, however the wages of Chinese workers fall. True False

False

the stock of equipment and structures that are used to produce goods and services

Physical Capital

the quantity of goods and services produced from each unit of labor input

Productivity

society's understanding of the best ways to produce goods and services

Technological Knowledge

Suppose over the past decade, Country A had a higher population growth and productivity growth than Country B. a) Real GDP in Country A grew slower than in Country B. b) Real GDP in both countries grew at the same rate. c) Real GDP in Country A grew faster than in Country B. d) Real GDP per person must be lower in Country B.

c) Real GDP in Country A grew faster than in Country B.

Promoting political stability can lead to ______ economic growth

greater

Public policies pursuing free trade can lead to ______ economic growth.

greater

Given that it takes only 35 years for an initial value to double if there is a 2 percent growth rate, we can conclude that _____

growth rates are compounding.

It is possible to increase economic growth with population growth because with more people, there are more ______ to contribute to technological advances.

scientists and inventors

Other things equal, relatively rich countries tend to grow ______ than relatively poor countries due to the ______

slower; catch-up effect.

Which of the following is measured by the growth rate of real GDP per person? a) Changes in the level of well-being in a country. b) Human capital. c) Growth rate of nominal GDP. d) Foreign direct investment.

a) Changes in the level of well-being in a country.

In Mexico, real GDP per person was $1,169 in 1900 and $14,350 in 2010. The growth rate was 2.31% per year. Which of the following is true? a) In some years the growth rate was higher than 2.31% per year, in other years, it was lower. b) 2.31% per year is an average rate of growth for real GDP per person, actual growth in each year was much higher. c) Each year, for 110 years, real GDP per person increased by 2.31%. d) 2.31% per year is an average rate of growth for real GDP per person, actual growth in each year was much lower.

a) In some years the growth rate was higher than 2.31% per year, in other years, it was lower.

Which of the following is an example of foreign portfolio investment? a) In the 1800s, Europeans purchased stock in American companies that used the funds to build railroads and factories. b) Ford Motor Company builds a car factory in Mexico. c) A European firm opens an interior design firm in San Francisco, CA. d) A European firm opens a new toy factory in China.

a) In the 1800s, Europeans purchased stock in American companies that used the funds to build railroads and factories. Feedback: Correct. A capital investment that is owned and operated by a foreign entity is called foreign direct investment, whereas an investment that is financed with foreign money but operated by domestic residents is called foreign portfolio investment. Therefore, the Europeans who purchased stock in American railroads companies engaged in foreign portfolio investment.

Real GDP per person more accurately measures a nation's standard of living than nominal GDP per person. True False

true

Consider the case of Crusoe's economy. Suppose Robinson Crusoe spends two hours to find ten turtle eggs. What is his productivity?

5 turtle eggs per hour. Feedback: Correct. A correct way to measure productivity is to divide the quantity of output by the number of hours worked: 10 turtle eggs / 2 hours = 5 turtle eggs per hour.

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

Catch-up Effect

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

Diminishing Returns

Countries that have had higher output growth per person have typically done so without higher productivity growth. True False

False

Other things the same, when an economy increases its saving rate, consumption increases now and production rises later. True False

False

Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to a higher growth rate of productivity in the long-run. True False

False

The historic data show that the world's poorest countries are doomed to remain in poverty. True False

False (same goes for rich staying rich, neither is set to stay that way)

Knowledge and skills that workers acquire through education, training, and experience

Human Capital

Inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

Natural Resources

Last year, a chocolate factory made 60,000 bars employing 100 workers, each of whom worked 8 hours per day. This year, the factory produced 70,000 toys, employing 80 workers, each of whom worked 10 hours per day. What can you say about factory's productivity?

Productivity increased by 16.7%. Feedback: Correct. Last year, productivity was 60,000 toys/ 100 workers/ 8 hours = 75 bars per hour. This year, it was to 70,000 toys / 80 workers/ 10 hours = 87.5 toys per hour. The productivity grew by 100* ((87.5 bars per hour - 75 bars per hour)/ 75 bars per hour) = 16.7%.

An economy which consumes only what it produces has the standard of living that is tied to productivity. True False

True

If a country's saving rate declined, then other things the same, in the long run, the country would have lower productivity and lower real GDP per person. True False

True

In the long run, the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables. True False

True

Japan's status as a rich nation is attributable to international trade, but not to Japan's domestic quantities of natural resources. True False

True Feedback: Correct. Natural resources are not necessary for an economy to be highly productive in producing goods and services. Japan, for example, is one of the richest countries in the world, despite having few natural resources. International trade makes Japan's success possible. Japan imports many of the natural resources it needs, such as oil, and exports its manufactured goods to economies rich in natural resources.

In Japan, real GDP per person was $1,517 in 1890 and $34,810 in 2010. The growth rate was 2.65% per year. Which of the following is true? a) The growth rate of 2.65% per year ignores short-run fluctuations around the long-run trend. b) 2.65% per year is an average rate of growth for real GDP per person, actual growth each year was much higher. c) Each year, for 120 years, real GDP per person increased by 2.65%. d) 2.65% per year is an average rate of growth for real GDP per person, actual growth each year was much lower.

a) The growth rate of 2.65% per year ignores short-run fluctuations around the long-run trend.

Which of the following statements is consistent with the fact that capital in an economy is subject to diminishing returns? a) When workers have a relatively small quantity of capital, giving them an additional unit of capital increases their productivity by a relatively large amount. b) When workers have a relatively large quantity of capital, giving them an additional unit of capital increases their productivity by a large amount. c) When workers have a relatively small quantity of capital, giving them an additional unit of capital will not increase their productivity. d) When workers already have a large quantity of capital, giving them an additional unit of capital will not increase productivity.

a) When workers have a relatively small quantity of capital, giving them an additional unit of capital increases their productivity by a relatively large amount.

Which of the following is an example of foreign direct investment? a) American saving is being used to finance Mexican investment. b) An American entrepreneur opens and operates a candy factory in Finland. c) In the 1800s, Europeans purchased stock in American companies that used the funds to build railroads and factories. d) A New York based interior design firm opens a store in San Francisco, CA.

b) An American entrepreneur opens and operates a candy factory in Finland.

Consider three countries with diminishing returns to capital. Country A has real GDP per person of $12,000; Country B has real GDP per person of $20,000; Country C has real GDP per person of $25,000. Suppose that the saving rate increases by the same rate in all three countries. a) In the long run, all three countries will have the same level of real GDP. b) For the next few years, Country A will grow faster than Countries B and C. c) For the next few years, Country C will grow faster than Countries A and B. d) In the long run, all three countries will grow at the same rate.

b) For the next few years, Country A will grow faster than Countries B and C.

In Canada, real GDP per person was $2,397 in 1870 and $38,370 in 2010. The growth rate was 2.00% per year. Which of the following is true? a) Each year, for 140 years, real GDP per person increased by 2.00%. b) The growth rate of 2.00% per year ignores short-run fluctuations around the long-run trend and represents an average rate of growth for real GDP per person over the period. c) The growth rate of 2.00% per year accounts for short-run fluctuations around the long-run trend. d) 2.00% per year is an average rate of growth for real GDP per person, actual growth in each year was much lower.

b) The growth rate of 2.00% per year ignores short-run fluctuations around the long-run trend and represents an average rate of growth for real GDP per person over the period.

Which of the following is an accurate explanation of why the average American today is "richer" than the richest American 100 years ago? a) Inaccurate measurements of personal fortunes. b) Tremendous technological advances. c) A century ago, people had fewer years of schooling. d) A century ago, international trade had not yet begun to flourish.

b) Tremendous technological advances.

A public policy that increases investment from abroad should _____ a) decrease future labor productivity. b) increase future labor productivity because the natural resources per worker increase. c) increase future labor productivity because it increases the current capital stock. d) have no effect on future labor productivity.

c) increase future labor productivity because it increases the current capital stock.

A public policy that increases saving and investment increases future labor productivity because the policy increases the

capital stock.

The downside of pursuing a policy that increases saving and investment is that current consumption of goods and services ______

decreases.

A domestic downside to a policy that increases education is that people must ______ to invest in education.

forgo current wages

The U. S. government has promoted research and development by _____

sponsoring research and enforcing patent laws.

The public policy of promoting research and development increases economic growth by leading to

technological advances.

A potential downside to a policy that increases investment from abroad is that it does not have ______ on all measures of economic prosperity.

the same effect