Econ 201M - Quiz 7: Chapter 24 Long Run Economic Growth

Scenario: Growth Rates Suppose that real GDP per capita of the United States is $32,000 and its growth rate is 2% per year. Real GDP per capita of China is $4,000, and its annual growth rate is 7%. Look at the scenario Growth Rates. According to the rule of 70, how large will China's real GDP per capita be in 20 years?

$16000

Output in the economy of Erewhon has grown 3% per year over the past 30 years. The labor force has grown at 1% per year, and the quantity of physical capital has grown at 4% per year. (Hint: % change in (X/Y) = % change in X − % change in Y.) How fast has productivity in Erewhon grown?

2% If output has grown 3% per year and the labor force has grown 1% per year, then productivity—output per person—has grown at approximately 3% − 1% = 2% per year.

Output in the economy of Erewhon has grown 3% per year over the past 30 years. The labor force has grown at 1% per year, and the quantity of physical capital has grown at 4% per year. (Hint: % change in (X/Y) = % change in X − % change in Y.) How fast has physical capital per worker grown?

3%

U.S. real GDP per capita in 2010 was _____ as much per person as in 1900.

758%

Are economists typically more concerned about the limits to growth imposed by environmental degradation or those imposed by resource scarcity?

Economists are typically more concerned about environmental degradation than resource scarcity Economists are typically more concerned about environmental degradation than resource scarcity. The reason is that in modern economies the price response tends to alleviate the limits imposed by resource scarcity through conservation and the development of alternatives. However, because environmental degradation involves a negative externality—a cost imposed by individuals or firms on others without the requirement to pay compensation—effective government intervention is required to address it. As a result, economists are more concerned about the limits to growth imposed by environmental degradation because a market response would be inadequate.

What is the link between greenhouse gas emissions and growth?

Growth increases a country's greenhouse gas emissions.

Multinomics, Inc., is a large company with many offices around the country. It has just adopted a new computer system that will affect virtually every function performed within the company.

It might be a temporary decrease in employees' productivity It will take a period of time for workers to learn how to use the new computer system and to adjust their routines. And because there are often setbacks in learning a new system, such as accidentally erasing your computer files, productivity at Multinomics may decrease for a period of time.

A quick review:

Long-run increases in living standards arise almost entirely from growing labor productivity, often simply referred to as productivity. An increase in physical capital is one source of higher productivity, but it is subject to diminishing returns to physical capital. Human capital and technological progress are also sources of increases in productivity. The aggregate production function is used to estimate the sources of increases in productivity. Growth accounting has shown that rising total factor productivity, interpreted as the effect of technological progress, is central to long-run economic growth. Natural resources are less important today than physical and human capital as sources of productivity growth in most economies. Countries differ greatly in their growth rates of real GDP per capita due to differences in the rates at which they accumulate physical capital and human capital as well as differences in technological progress. A prime cause of differences in growth rates is differences in rates of domestic savings and investment spending as well as differences in education levels, and research and development, or R&D, levels. R&D largely drives technological progress. Government actions can promote or hinder the sources of long-term growth. Government policies that directly promote growth are subsidies to infrastructure, particularly public health infrastructure, subsidies to education, subsidies to R&D, and the maintenance of a well-functioning financial system. Governments improve the environment for growth by protecting property rights (particularly intellectual property rights through patents), by providing political stability, and through good governance. Poor governance includes corruption and excessive government intervention. East Asia's spectacular growth was generated by high savings and investment spending rates, emphasis on education, and adoption of technological advances from other countries. Poor education, political instability, and irresponsible government policies are major factors in the slow growth of Latin America. In sub-Saharan Africa, severe instability, war, and poor infrastructure—particularly affecting public health—resulted in a catastrophic failure of growth. But economic performance in recent years has been much better than in preceding years. The convergence hypothesisseems to hold only when other things that affect economic growth—such as education, infrastructure, property rights, and so on—are held equal. There's wide disagreement about whether it is possible to have sustainable long-run economic growth. However, economists generally believe that modern economies can find ways to alleviate limits to growth from natural resource scarcity through the price response that promotes conservation and the creation of alternatives. Overcoming the limits to growth arising from environmental degradation is more difficult because it requires effective government intervention. Limiting the emission of greenhouse gases would require only a modest reduction in the growth rate. There is broad consensus that government action to address climate change and greenhouse gases should be in the form of market-based incentives, like a carbon tax or a cap and trade system. It will also require rich and poor countries to come to some agreement on how the cost of emissions reductions will be shared.

Predict the effect of each of the following events on the growth rate of productivity. The amount of physical capital per worker grows at a steady pace, but the level of human capital per worker and technology are unchanged.

The growth rate of productivity will fall but remain positive The growth rate of productivity will fall but remain positive due to diminishing returns to physical capital.

During the 1990s in the former Soviet Union a lot of property was seized and controlled by those in power. How might this have affected the country's growth rate at that time? True or False: It is likely that these events resulted in a fall in the country's growth rate because the lack of property rights would have dissuaded people from making investments in productive capacity.

True

Explain the link between a country's growth rate, its investment spending as a percent of GDP, and its domestic savings. True or False: A country that has high domestic savings is able to achieve a high rate of investment spending as a percent of GDP. This, in turn, allows the country to achieve a high growth rate.

True

Some economists think the best way to help African countries is for wealthier countries to provide more funds for basic infrastructure. Others think this policy will have no long-run effect unless African countries have the financial and political means to maintain this infrastructure. The following suggestion is True or False: The evidence suggests that both sets of factors matter: better infrastructure is important for growth, but so is political and financial stability. Policies should try to address both areas.

True

Some economists think the best way to help African countries is for wealthier countries to provide more funds for basic infrastructure. Others think this policy will have no long-run effect unless African countries have the financial and political means to maintain this infrastructure. True or False the following suggesting regarding polices. The evidence suggests that both sets of factors matter: better infrastructure is important for growth, but so is political and financial stability. Policies should try to address both areas.

True

Some economists think the high rates of growth of productivity achieved by many Asian economies cannot be sustained. Why might they be right? What would have to happen for them to be wrong? The following answer is True or False: The conditional version of the convergence hypothesis says that countries grow faster, other things equal, when they start from relatively low GDP per capita. From this we can infer that they grow more slowly, other things equal, when their real GDP per capita is relatively higher. This points to lower future Asian growth. However, other things might not be equal: if Asian economies continue investing in human capital, if savings rates continue to be high, if governments invest in infrastructure, and so on, growth might continue at an accelerated pace.

True

U.S. centers of academic biotechnology research have closer connections with private biotechnology companies than do their European counterparts. What effect might this have on the pace of creation and development of new drugs in the United States versus Europe? True or False: It is likely that the United States will experience a greater pace of creation and development of new drugs because closer links between private companies and academic research centers will lead to work more directly focused on producing new drugs rather than on pure research.

True

Economists mostly agree that the problem of climate change necessitates government action in the form of market-based incentives such as:

a carbon tax or a cap and trade system.

What is the expected effect on growth from emissions reduction?

a large reduction in emissions will result in only a modest reduction in growth

Diminishing returns to physical capital means that when the amount of human capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to:

a smaller increase in the marginal product of labor.

An increase in capital stock would:

cause a movement to the right along a stationary production function

From the standpoint of economic growth, banks are important to:

channel savings into investment.

The rule of 70 is most useful in:

estimating the doubling time of real GDP for a given growth rate.

Long-run economic growth is:

higher in countries with a strong rule of law and political stability.

The skills, training, and education possessed by workers that contribute to economic growth are known as:

human capital.

Which of the following contributes to economic development?

investment in infrastructure

To acquire human capital a person would:

learn to use a printing press.

Productivity is declining when:

population growth exceeds real GDP growth.

Predict the effect of each of the following events on the growth rate of productivity. The amounts of physical and human capital per worker are unchanged, but there is significant technological progress.

positive growth rate of productivity Significant technological progress will result in a positive growth rate of productivity even though physical capital per worker and human capital per worker are unchanged.

The key measure used to track economic growth is:

real GDP per capita.

All else equal, a nation that has a high rate of _____ will have a high rate of _____ and therefore a high growth rate of _____ capital.

savings; investment; physical

Diminishing returns to physical capital suggests that:

when the amount of human capital per worker and the state of technology are fixed, successive increases in the amount of physical capital per worker lead to smaller increases in productivity.