Ch 8 Review Problems

Assume that a "leader country" has real GDP per capita of $40,000, whereas a "follower country" has real GDP per capita of $20,000. Next suppose that the growth of real GDP per capita falls to zero percent in the leader country and rises to 7 percent in the follower country. If these rates continue for long periods of time, how many years will it take for the follower country to catch up to the living standard of the leader country?

*10 years* 70/7 =10 *rule of 70

a. According to economic historians, modern economic growth first happened in

1776, when Scottish inventor James Watt perfected a powerful and efficient steam engine.

Suppose a country's real GDP is $15 trillion and that population is 400 million. a. What is this country's real GDP per capita?

37,500 Real GDP per capita is $37,500 (= real GDP ($15,000,000,000,000)/population (400,000,000).

Suppose that during the next 10 years, real GDP doubles and population grows by half in the country. b. After 10 years have passed, what will be this country's real GDP per capita?

50,000 50,000 (= real GDP ($30,000,000,000,000)/population (600,000,000).

a. What is real GDP in Molpol?

If productivity (average real output per hour of work) is $10, then real GDP in Molpol will be *$196,000* (= 19,600 × $10

Suppose that Alpha and Omega have identically sized working-age populations but that total annual hours of work are much greater in Alpha than in Omega. This could happen because

Omega's labor force is underemployed, or Omega workers place a higher value on leisure than those in Alpha.

b. Which of the following are among the major institutional structures that form the foundation for modern economic growth?

Strong property rights, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, and a competitive market system.

c. Rearrange the following contributors to the growth of productivity in descending order of their quantitative importance: economies of scale, quantity of capital, improved resource allocation, education and training, and technological advance.

Technological advance, quantity of capital, education and training, economies of scale, and improved resource allocation.

c. What are the characteristics of the major institutional structures that form the foundation for modern economic growth?

They increase saving and investment, promote the development of new technologies, and ensure that resources flow efficiently to the most productive uses.

a. Economic growth means

a higher standard of living, provided that population does not grow even faster.

Refer to the figure below and assume that the combined consumer goods + capital goods values for points a, b, and c are $10 billion, $20 billion, and $18 billion, respectively. a. If the economy moves from point a to point b over a 10-year period, what must have been its annual rate of economic growth?

a) 7% 70/10 =7%

Refer to the figure below and assume that the combined consumer goods + capital goods values for points a, b, and c are $10 billion, $20 billion, and $18 billion, respectively. b. If, instead, the economy was at point c at the end of the 10-year period, by what percentage did it fall short of its production capacity?

b) 10% 2billion/20billion =0.1 = 10%

Suppose work hours rise by 2.5 percent to 20,090 hours per year and labor productivity rises by 4 percent to $10.4. b. In year 2, what will be Molpol's real GDP?

b. If work hours rise by 2.5 percent to 20,090 hours and labor productivity rises by 4 percent to $10.4 per worker, Molpol's real GDP will increase to *$208,936* (= 20,090 × $10.4) in year 2.

c. Between year 1 and year 2, what will be Molpol's rate of economic growth?

c. Molpol's rate of economic growth will be about *6.6* percent (= ($208,936 − $196,000)/196,000)) for the year.

b. The difference between a 2.5 percent and a 3.0 percent annual growth rate over several decades could be the difference between

output doubling in 28 years (2.5 percent growth) and 23 years (3.0 percent growth).

b. Since at least 1995 the majority of increases in U.S. real GDP are from

productivity growth.

a. More labor inputs can explain

some of the increases in U.S. real GDP during the last 62 years or so.