Chapter 7
The subsistence level is the ___________.
minimum level of income per person that is generally necessary for an individual to survive.
There was no sustained growth in living standards prior to the Industrial Revolution because __________.
with output increasing at a decreasing rate, it is not possible to increase living standards, especially as the population continues to grow.
Could the country achieve a high level of economic development?
No, the country's extractive institutions limit prosperity.
The existence of extractive institutions discourages entrepreneurship in an economy by ____________.
creating barriers to entry
Political creative destruction refers to ____________.
economic growth destabilizing political regimes.
To analyze patterns of prosperity and growth before modern day GDP statistics, we need to find another way to measure prosperity and growth. To measure prosperity in 1500, the EBE depends on all of the following, except:
Countries with low GDP per capita tend to have a large population density.
Initial phases of the growth process are often accompanied by increasing income inequality within a country. Using concepts developed in the chapter, explain why this might be the case.
Creative destruction creates economic winners and losers.
Holding all else equal, will increasing the efficiency units of labor lead to sustained growth? Why?
Not likely, because each individual has a finite life and there is a limit to the number of years of schooling that an individual can obtain.
In the context of this chapter, what is meant by an institution?
Regulations Laws
Suppose the return and cost of entrepreneurship curves are described by the following equations (with numbers measured in the thousands): R=900−50N C=100+150N, where R=returns to entrepreneurship, C=cost of entrepreneurship, and N=number of entrepreneurs. Based on the equations given, the cost-of-entrepreneurship curve differs from the one drawn in the chapter because it is ____________. The equilibrium number of entrepreneurs is N=4 thousand. (Round your response to two decimal places.) The equilibrium returns to entrepreneurship is R=$700 thousand. (Round your response to two decimal places.) The government enacts a license fee of $100 thousand to file the paperwork necessary to start a firm. The new equilibrium number of entrepreneurs is N=3.5 thousand. (Round your response to two decimal places.) The new equilibrium returns to entrepreneurship is R=$725 thousand. (Round your response to two decimal places.)
upward-sloping, indicating the opportunity cost of entrepreneurship increases with the number of entrepreneurs.
If GDP per capita in year T is represented by YT, and the GDP per capita in the following year is represented by YT+1, then the formula for calculating growth rate between these two years is ________.
(YT+1 − YT)/YT
Parts of the world that were relatively more prosperous 500 years ago have experienced a reversal of fortune and are relatively poorer today. What factors could explain this?
A and C only.
Economic growth is ____________.
the increase in income (GDP) per capita of an economy.
Suppose a country has well-enforced private property rights for entrepreneurs, but a large fraction of the population does not have access to education and thus cannot become entrepreneurs and would have low productivity as workers. Would you say this country has inclusive or extractive economic institutions?
Extractive institutions, because barriers block access to education.
If increasing the stock of physical capital does not lead to sustained growth for China, what should China do to ensure the sustainability of its growth model?
Improve its technology.
The chapter discusses Max Weber's argument that the origins of industrialization in Western Europe could be traced to Protestantism. According to Weber, the Protestant work ethic was crucial to the development of a market economy and economic growth. Weber, however, also claimed that religions like Confucianism in China and Hinduism in India were not conducive to the development of capitalism. Given that India and China are now among the fastest-growing economies in the world, how effective do you think the culture hypothesis is in explaining economic development?
Ineffective, because culture's effect on growth is not linear.
In drawing these conclusions, one should remember that the measure of the contribution of U.S. technology in each period is:
Inferred or calculated as what is left over after subtracting the percent contribution of human and physical capital.
Which of the following statements is true of foreign aid?
In practice, much of foreign aid does not get invested in new technology or education.
Higher quality U.S. data means we can measure U.S. productivity by GDP per hour worked. This is a better measure than GDP per worker because:
It removes any change in average hours worked when it figures productivity for each decade.
In the context of this chapter, what is meant by an institution?
Laws
Which factor is the most important contributor to growth in the United States?
Technology (A).
What did Malthus predict about economic growth?
The number of children per family would adjust so that income would remain close to a subsistence level.
Why was there no sustained economic growth before modern times, that is, before 1800? (Check all that apply.)
The pace of technological change was much slower than in modern times. Increases in aggregate income were offset by increases in population, keeping per capita income low.
Which of the following is one of the three important elements that define institutions?
They determine incentives They are determined by individuals They place constraints on behavior
Which of the following is one of the three important elements that define institutions?
They determine incentives.
Why would a government undertake policies that would adversely affect the lives of its citizens?
To maintain its power
Population density, like the fraction of the population urbanized (the fraction of the population living in urban centers with 5,000 or more inhabitants), can be used as a measure of economic development for areas 500 years ago (say, in 1500). Suppose the graph on the right illustrates the relationship between population density in 1500 and GDP per capita in 1500 and between population density in 1500 and GDP in 2005. Based on this information, you can conclude there is ____________.
a positive relationship between population density in 1500 and prosperity has become negative.
A country that has a lower GDP per capita than another country in some year can end up with a larger GDP per capita in later years because it has (Select all that apply.)
accumulated physical capital at a more rapid pace. generated faster improvements in the efficiency of its labor. initiated and used more rapid advances in technology.
Over the past 200 years, the U.S. economy has shown ____________.
an increase in income per capita, albeit not an entirely steady one.
The Industrial Revolution had a positive impact on living standards __________.
because of the introduction of new capital and technology that shifted the production curve upward.
The Industrial Revolution affected economic growth ____________.
because technological changes, such as new machinery and new methods of production, became more systematic and pervasive, underpinning economic growth.
Factors that help households decide whether to consume or save their income are ___________. (Check all that apply.)
expectations about taxes. expectations of future income growth. the interest rate.
The saving rate in an economy is defined as the ____________.
fraction of total income that households save.
Based on your understanding of the chapter, poverty can best be reduced by ____________. (Check all that apply.)
improving the knowledge and technologies available in the world economy. increasing international trade.
According to the aggregate production function, GDP increases when a nation ____________. (Check all that apply.)
increases its stock of physical capital, K. improves its technology, A. increases the human capital of its workers,
The return-to-entrepreneurship curve shows the ____________.
number of entrepreneurs with at least a particular level of returns.
Exponential growth is the ____________.
process by which new growth builds on past growth, leading to a (roughly) constant growth rate.
Sustained growth is the ____________.
process where GDP per capita grows at a positive and relatively steady rate for long periods of time.
Suppose the country of Burondo is one of the poorest countries in the world. Its economy is heavily reliant on income from the export of oil. There are only two oil-extracting companies in Burondo. Both are owned by the government. A large part of the earnings from oil exports goes toward financing the president's lifestyle and entourage. Burondo has not had a single democratic election ever since it gained independence 50 years ago. Although Burondo is said to have abundant oil resources, only a small proportion is extracted every year because the extraction process is so inefficient. Transporting goods in and out of the country is costly, as Burondo is surrounded by lofty mountain ranges. School enrollment in this country is very low and as a result, most of the adult population is illiterate. Life expectancy is also quite low. Agriculture is collectivized in Burondo and so food shortages are common in the country. Using the information given, distinguish between the fundamental and proximate causes of prosperity (or its absence) in Burondo. Proximate causes of Burondo's lack of prosperity are ___________. (Check all that apply.)
school enrollment is low. food shortages affect health the workforce is not skilled most of the adult population is illiterate
An example of sustained growth is ____________.
the United States, which demonstrated sustained growth between 1820 and 2007.
The potential process of political creative destruction could lead to extractive institutions because ____________.
the politically powerful fear losing their privileged positions
The institutions hypothesis explains the difference in prosperity among nations is due to ____________.
the way societies organize themselves.
According to the geography hypothesis, incomes in poor countries are ____________.
unlikely to be changed, because climate is largely out of their control.
According to the geography hypothesis, incomes in poor countries are ____________.
unlikely to be changed, because geography is largely out of their control.
Suppose the return and cost of entrepreneurship curves are described by the following equations (with numbers measured in the thousands): R=1,000−50N C=200+150N, where R=returns to entrepreneurship, C=cost of entrepreneurship, and N=number of entrepreneurs. Based on the equations given, the cost-of-entrepreneurship curve differs from the one drawn in the chapter because it is ____________.
upward-sloping, indicating the opportunity cost of entrepreneurship increases with the number of entrepreneurs.
The opportunity cost of entrepreneurship is the ____________.
value to a potential entrepreneur of her best alternate activity.
An example of catch-up growth is ____________.
South Korea, which by 1970 had become poorer relative to the United States, but over the last 40 years grew faster than the United States, closing the gap that had opened up previously.
Exhibit 7.11, summarizes the impact of all three factors to growth in GDP per hour worked for each decade since 1950. One could reasonably conclude that:
Technology has been the largest contributor in the decades where growth has been largest.
Which factors explain economic growth in the United States over the past few decades? (Check all that apply.)
Technology (A). Physical capital (K). Human capital (H).
According to the aggregate production function, which inputs drive production? (Check all that apply.)
Physical capital. Level of technology. Total efficiency units of labor.
Fundamental causes of Burondo's lack of prosperity are ____________. (Check all that apply.)
the geography is not favorable. the government is an extractive political institution the farmers have limited incentive to bring their produce to market the agricultural industry is collectivized there are few constraints to the excercise of power
The graph on the right shows an index of world GDP per capita from 1000 BC to the year 2000. As you can see, over most of that period, global economic growth was virtually nonexistent. While there were periods that experienced some increase in per capita income, sustained growth begins only in the middash-18th century, and explodes after that—by the year 2000, income per capita is 12 times what it had been 250 years before. The dramatic change in economic growth beginning in the 18th century may be accounted for by
A and C only.
Consider two countries−country A and B. Both economies are exactly similar in all aspects except for one. There are well−defined property rights in country A, while there are no property rights in country B. Given this information, which of the following statements is likely to be true?
Economy A is likely to grow faster than economy B.
Which of the three hypotheses developed in the chapter would be most likely to view foreign aid as essential for economic development? Explain.
Geography hypothesis, because geography cannot be changed.
In 1968, Paul Ehrlich, a Stanford University professor, claimed that overpopulation would lead to famines and starvation in the 1970s and 1980s. In his book The Population Bomb, he said that unless population growth was curbed, millions around the world would die. However, as we now know, this did not happen. What do you think was the flaw in Ehrlich's argument?
He did not account for the role that technology can play in increasing the food supply.
Which of the following is an example of a proximate cause of prosperity?
Human capital
In his book The Elusive Quest for Growth, development economist William Easterly discusses the relationship between foreign aid and investment in poor countries. He posits that to establish the effectiveness of aid in promoting investment, two tests should be passed: First, there should be a positive statistical association between aid and investment; second, aid should pass into investment 1 for 1, that is, a 1 percent (of GDP) increase in aid should result in a 1 percent (of GDP) increase in investment. Using a data set of 88 countries from 1965 to 1995, he finds that only 17 of 88 countries pass the first test, and of them, only 6 pass the second. Based on the information in the chapter, and perhaps your own reading, explain why foreign aid designed to spur investment usually does not work.
It is frequently diverted to corrupt officials. It is insufficient to sustain growth
In the 1990s, Uganda received a sizable amount of foreign aid from the international community for education. However, only 13 percent of schools in Uganda actually received the grants funded by the aid. What might explain why so few Ugandan primary schools benefited from the foreign aid?
It was stolen by government officials for their own use.
In the 1980s, the saving rate in Japan was extremely high. The saving rate ranged between 30 percent and 32 percent. Since saving leads to investment, is a very high saving rate always good for the economy?
No, a high saving rate cannot lead to sustained economic growth because there is a maximum amount of aggregate income that an economy can achieve by increasing saving, since the economy can never exceed a saving rate of 100 percent.
China's economy is one of the fastest-growing economies in the world. Growth in China is primarily driven by investment and exports. You are discussing the sustainability of China's growth model with your friend. He says that according to the aggregate production function, China needs to continue to increase its physical capital stock to ensure sustainable growth. Do you agree?
No, because diminishing marginal product of capital means that growth will not be sustained.
Did his predictions come true?
No, because he failed to account for the demographic transition and the impact of the Industrial Revolution.
Does an increase in GDP per capita of a nation imply that all its citizens have become richer?
No, because the average income per capita of a nation is not the same as the income of each individual in that nation.
What factors explain the dramatic increases in life expectancy that we saw in most countries in the twentieth century? (Select all that apply.)
The establishment of simple but effective medical and public health practices. Innovations in disease control, including the use of DDT against malaria. Scientific breakthroughs leading to the development of antibiotics and vaccines
How are the proximate causes of prosperity different from the fundamental causes of prosperity?
The fundamental causes of prosperity are the factors that explain the levels of the proximate causes of prosperity.
Look at the following map of Nogales, a twin city that is divided by the U.S. border. One part of Nogales lies in the United States, in Arizona, and the other part lies in Sonora, Mexico. Life in Nogales, Mexico is very different from life in Nogales, Arizona. The average income in Nogales, Mexico is about one-third the average income in Nogales, Arizona. Education levels, life expectancy, and health conditions are better in Nogales, Arizona than in Nogales, Mexico. Unlike Nogales in Arizona, Nogales in Mexico has only recently adopted political reforms, bringing it closer to functioning as a democracy. Crime rates are also lower in Nogales, Arizona than in Nogales, Mexico. Since both cities are located so close to each other, they share similar geographical conditions and climate. The inhabitants of both cities also share a common ancestry and enjoy the same type of food and music. Based on this information, Nogales, Arizona is likely more prosperous than Nogales, Mexico because ____________.
U.S. citizens can take part in elections that allow them to elect their government democratically.
The geography hypothesis maintains that geographic features such as climate and soil conditions are the key determinants of differences in economic growth and prosperity. It is reasonable to conclude that this hypothesis is NOT the main explanation for the data in Exhibits 8.6 and 8.7 for which of the following reasons (Check all that apply):
We observe lower prosperity in North America than in Peru and India in 1500. The activities that generate high levels of GDP per capita in 2010 are unlikely to be closely connected with climate and agricultural conditions. Mexico, India, sub-Saharan Africa are relatively poorer today than 500 years ago.
After the Second World War, Germany was divided into two parts, East Germany and West Germany. East Germany was controlled by the former Soviet Union while West Germany was controlled by the other Allied governments: the United States, the United Kingdom, and France. The war had destroyed most of Germany's economy. The Soviet Union as well as the Allied occupation forces sought to rebuild the economies of their respective parts. Before the fall of the Berlin Wall reunited East and West Germany in 1990, West Germany's economy grew at an annual average growth rate of 4.4 percent, which was about 3 times higher than East Germany's rate. Draw the parallel between the natural experiment discussed in the chapter and the case of East and West Germany. Based on the information given in the question and your own research, why do you think two otherwise similar areas had such divergent growth rates? East and West Germany likely had different growth rates because ____________.
West Germany's economic institutions were market oriented.
Household saving decisions impact investment in the economy by having ___________.
a direct impact on investment, as saving is correlated with investment.
The geography hypothesis states ____________.
climate is responsible for differences in prosperity
The culture hypothesis states ____________.
cultural beliefs are responsible for differences in prosperity.
Unlike extractive economic institutions, inclusive economic institutions ____________.
enforce contracts
To say that private property rights are well-enforced in an economy means that ____________.
individuals can securely hold assets.
Physical capital accumulation is driven by ____________.
investment.
In general, the subsistence level ____________.
is unique in each environment
Households play a role in physical capital accumulation because ____________.
it is households that determine their level of consumption and therefore the rate of saving.
Initially, the creation of railroads was opposed in some countries because:
it was likely to initiate creative destruction.
Catch-up growth is the ____________.
process by which relatively poorer nations increase their incomes by taking advantage of the knowledge and technologies already invented in other technologically advanced nations.
Private property rights foster economic development by ____________.
providing incentives to borrow money. providing incentives to invest providing incentives to start a business
The causes of prosperity that link high levels of prosperity to high levels of inputs of production, without explaining why the levels of those inputs are high, are referred to as:
proximate causes of prosperity.
Zimbabwe, formerly known as Rhodesia, was a British colony for around ninety years. It became independent in 1980. The prime minister of newly formed Zimbabwe, Robert Mugabe, implemented a forced land redistribution policy, where commercial farms were confiscated from white farmers. Mugabe also proceeded to confiscate shares in companies owned by whites. In the following years, agricultural production in the country fell sharply. Zimbabwe, the country that used to be called the breadbasket of Africa, is now seeing food shortages in certain parts of the country. Would Zimbabwe be considered to have extractive or inclusive institutions? Explain your answer.
Extractive institutions, because it doesn't protect property rights.
