ECON 333-70 Exam 1 Study Guide

Which religions(s) are have a non-cyclical, linear view of time?

Abrahamic religions (Christianity, Islam, Judaism)

In Marxian economics, the maximum profit is obtained when

Workers wages are almost zero and when they work very fast to produce maximum turn-around in production.

Consider the function: Y = √K. √L. If the value of K is tripled and the value of L is also tripled, will the value of Y triple as well?

Yes

Human Development Index (HDI) calculations

(Country specific value - realistically the lowest value possible)/(highest value - lowest value)

When capital increases by ΔK units and labor increases by ΔL units, output (ΔY) increases by:

(MPL × ΔK) + (MPK × ΔK) units.

In Adam Smith's theory of growth, which of the following countries is likely to grow the fastest?

A large country with relatively high division of labor

What does the Solow model predict?

-ncreasing capital relative to labor creates economic growth, since people can be more productive given more capital. -Poor countries with less capital per person will grow faster than rich countries with ample capital because each investment in capital will produce a higher return. -Because of diminishing returns to capital, economies will eventually reach a point at which no new increase in capital will create economic growth.

If capital (K) and labor (L) are combined to create output (Y) according to the following relation (production function): Y = √K. √L, What is the approximate marginal product of labor if K = 10, L = 18?

0.37

Suppose that output per worker is 10, the production function is y = √k and the total capital stock is 1,000. How large is the labor force?

10

Suppose that the production function is y = √k [that is, output per worker is equal to the square root of capital per worker], s = 0.40, and delta [the depreciation rate] = 0.10. What level saving will lead to the highest possible level of output in the steady state? Assume that there is no population growth and no productivity growth

100 percent

The variable "G" in HDI calculation formula has 2.60206 in the denominator. This is because

2.60206 = LOG10 (the maximum bechmark per capita income value) - LOG10 (minimum benchmark per capita income value)

If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the Golden Rule steady-state capital-output ratio is 4.29, to reach the Golden Rule steady state, the saving rate must be:

30 percent

If capital lasts an average of 25 years, the depreciation rate is approximately ________ percent per year.

4

Amazing Land wants to grow at 10% every year. The country has an incremental capital output ratio of 4. According to the Harrod Domar model, how much should the country attempt to save to achieve its goal of 10% growth? Assume that there is no depreciation.

40%

How does population growth help explain why some countries are poor and some are rich?

An increase in the rate of population growth reduces the steady state level of capital per worker. The Solow model assumes that countries with higher population growth will have lower levels of GDP per person, therefore lower incomes, and vice versa.

Assume that the poorest country in the world is Sierra Leone and the richest country in the world is Luxembourg. Assume that Sierra Leone has a per capita PPP GDP of $550 and Luxembourg has a per capita PPP GDP of $61,610. If Luxembourg grows at 1% per capita per year and Sierra Leone grows at a healthy 3% per capita, how long will it take Sierra Leone to catch up with Luxembourg? Hint: if X grows at at 5%, after two years, X becomes X(1.05)2 - you can also use a spreadsheet.

Approximately 240 years.

Which of the following countries./regions Zheng He did not visit?

Australia

Which of the following inventions may have played a role in explosive economic growth of Europe circa 1900?

Bell's Telephone

Max Weber's idea of Capitalism reflects the fact that:

Capitalism is, in many ways, a function of culture as it is fundamentally an "attitude" that a capitalist society has.

Historian E.H. Carrr notes that the accidental love affair between Antony and Cleopatra paved the way for the mighty Roman Empire to emerge and thus it played a very important role in the subsequent history of the world. The battle of Actium between Mark Antony (supported by the fleet of Cleopatra, queen of Ptolemaic Egypt) and Octavian (Caesar Augustus), which was fought on September 2, 31 BC led to the downfall of the Pharaohs and the rise of the Roman Empire. The battle of Actium would not have happened if Antony did not fall in love with Cleopatra and if Cleaopatra did not have a pretty nose. EH Carrr has wondered whether such "accidents," not other greater underlying forces, have shaped human history. Historian Fukuyama looks at this issue and thinks that:

Cleopatra's beautiful nose may have temporarily changed the direction of history, but there is a fundamental long run historical trajectory in spite of such accidental events.

HDI: Education

E = (2LR+CGER)/3

T/F: Countries in tropical Savannah usually perform better (with regard to per capita income), than the countries located in tropical rainforest.

False

T/F: GDP calculated at the official or market exchange rates is likely to be significantly different from GDP adjusted for PPP if there is a large non-traded sector.

False

An important reason why the vast Inca Empire above collapsed is because of:

Francisco Pizarro Gonzalez and the spread of smallpox

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state consumption is (assume that there is no population growth or labor efficiency growth):

From the production function, y = k1/2 = 41/2 = 2 Per capita consumption is: (1-s)y = (1-0.8)2 = 1.6

HDI: GDP

G = (log10 GDPpc-2)/2.60206

GDP per capita formula

GDP per capita = GDP/N = GDP/Population

If hot climates lead to lower growth rates, which of the following might reduce economic growth in poor countries?

Global warming

HDI

HDI = (L+E+G)/3

What is the Human Development Indicator?

HDI takes a weighted average of: • Health • Life Expectancy • Education

The biggest killer of children (under age five) in the poor countries is:

Pneumonia and diarrhea

William Bernstein writes: "During the 14th to the 17th centuries, cinnamon, cloves, nutmeg, pepper and other spices replaced incense and perfumes as the most precious long-range trade commodities." Which of the following modern day countries emerged as famed "Spice Islands" at that time?

Indonesia

How does population growth affect the steady state?

Population growth along with investment and depreciation affect the accumulation of capital per worker. The change in the capital stock per worker is k = i − ( + n + g)k

A war has wrecked the economy of Baloneya: both the capital stock and the work force have been reduced by 50 percent. If the economy's production function has constant returns to scale, in the Solow model, how will the postwar level of output per worker compare to the prewar level?

It will be the same.

HDI: Longevity

L = (LE-25)/60

At constant 1985 lira (or, L), real GNP in Turkey rose from L 27,797 billion in 1985 to L 37,264 billion in 1990. Turkey's incremental capital output ratio or ICOR over this period of time averaged 3.9. What was the total value of the increment to the capital stock over this five-year period (also at constant 1985 prices)?

L36,921 billion

Larger quantities of steady-state capital have both a positive and negative effect on consumption per worker in the Solow model (assume no population growth or change in the efficiency of labor). Explain.

Larger quantities of steady-state capital increase the capital-per-worker ratio and increase the quantity of output, and, therefore, a greater quantity of output is available for consumption per worker. Large quantities of steady-state capital generate more depreciation, which must be replaced from output in order to maintain the steady state, thus reducing the amount of output available for consumption per worker.

Which of the following diseases seem to have originated from animals?

Malaria

How to calculate PPP Adjusted Value

PPP adjusted GDP = we find the foreign quantities produced and multiply those quantities by US prices of those products. We do this for all products and sum them up. This yields PPP adjusted GDP

Classical economists (the Physiocrats, Smith, Marx) were very much interested in the concept of "value." The reason why, in their minds, "value" and growth were related is because:

Real economic growth is nothing but an increase in extra or "surplus" value. The economists had different opinions on where the "surplus" came from.

Richland and Poorland are identical in all aspects, except that Richland has a labor efficiency index (h) of 10 while Poorland has a labor efficiency index of 2. Both Richland and Poorland have reached their steady states. What can we say about their steady state per capita incomes?

Richland will have five times the per capita of poorland in the steady state,

Explain the two uses of saving in the steady state in the Solow model with population growth, but no progress in the efficiency of labor.

Saving supplies: (1) the investment to replace the depreciating capital, and (2) investment to equip the new workers with the same amount of capital as existing workers in the economy so that the steady-state capital-worker ratio does not change

Which of the following is a weakness of the Solow model?

Taking technological change as exogenously given

It rains so much in the country of Tropicana that capital equipment rusts out (depreciates) at a much faster rate than it does in the country of Sahara. If the countries are otherwise identical, in which country will the Golden Rule (=highest consumption in steady state) level of capital per worker be higher? Illustrate graphically.

The Golden Rule (=highest consumption in steady state) level of capital per worker will be higher in Sahara.

What is the marginal product of capital (MPK), as shown with the Solow model?

The slope of the production function shows that an extra unit of capital produces extra output from a worker. The amount of this extra output is called marginal product of capital.

Which is NOT an important reason why in the Lewis model a poor country may face stagnation?

The urban wage may fall below the rural wage.

Mercantilists are more willing to impose import tariffs on imports.

True

T/F: Richland and Poorland have identical production functions (y = k0.5), same population growth rates (2%) and same labor efficiency growth rates (2%). But Richland's savings (in percent) is twice that of Poorland. In Solow steady state, Richland will have twice the per capita income of Poorland.

True

T/F: Richland and Poorland have identical production functions (y = √k), same population growth rates (2%) and same technological growth rates (2%). But Richland's savings (in percent) is twice that of Poorland. In Solow steady state, Richland will have twice the per capita income of Poorland.

True

World Bank figures show that in 2004, per capita GNI of Burundi (Atlas method) was $90; but when adjusted for purchasing power parity, Burundi's per capita GNI turns out to be $660. This means that:

When $10 is converted to Burundi Franc, the purchasing power of $10 is more in Burundi, compared to what it is in the United States.

When does a steady state occur?

When the economy finds itself at the level of capital stock where the amount of investment equals the amount of depreciation, the capital stock will not change. So the capital stock and output are steady over time rather than growing or shrinking. This is called the steady state level of capital.

Draw well-labelled graphs that illustrate the steady states of the Solow model with population growth (but no technological growth). Use the graph to find what happens to steady-state capital per worker and income per worker in response to each of the following exogenous changes: a) A change in consumer preferences increases the savings rate b) A change in weather pattern (climate change) increases the depreciation rate c) Better birth control methods reduce the population growth d) A one-time, permanent improvement in technology increases the amount of output that can be produced from any given amount of capital and labor.

a) An increase in the saving rate will shift the saving curve upwards, as illustrated below. Since actual investment is now greater than breakeven investment, the level of capital per worker will increase and the steady-state level of capital per worker will be higher. The increase in capital per worker will increase output per worker. b) Change in the weather pattern: An increase in the depreciation rate will shift the break-even investment line upwards to (δ2 + n) as illustrated below. Since actual investment is now less than break-even investment, the level of capital per worker will decrease and the steady-state level of capital per worker will be lower. The decrease in capital per worker will decrease output per worker. c) A reduction in the rate of population growth will shift the break-even investment line down and to the right to (δ + n2). See below. Since actual investment is now greater than break-even investment, the level of capital per worker will increase and the steady-state level of capital per worker will be higher. The increase in capital per worker will increase output per worker. d) The technological improvement increases output f(k), and as a result the saving curve shifts upwards. Since actual investment is now greater than break-even investment, the level of capital per worker will increase and the steady-state level of capital per worker will be higher. The increase in capital per worker will increase output per worker.

Suppose that two countries are exactly alike in every respect except that population grows at a faster rate in country A than in country B. a. Which country will have the higher level of output per worker in the steady state? Illustrate graphically. b. Which country will have the faster rate of growth of output per worker in the steady state?

a. Country B will have the higher level of output per worker. b. In the Steady State, the growth rate of output per worker will be zero in both country A and country B.

The Solow growth model assumes that the production function exhibits

constant returns to scale.

The economies of two countries, North and South, have the same production functions, depreciation rates, and saving rates. The economies of each country can be described by the Solow growth model. Population growth is faster in South than in North. a. In which country is the level of steady-state output per worker larger? Explain. b. In which country is the steady-state growth rate of output per worker larger? c. In which country is the growth rate of steady-state total output greater?

a. North will have a higher level of steady-state output per worker because the population growth is faster in South. The same saving in both countries means that investment in both countries will be the same. However, capital will be spread more thinly per worker in the South, where the population is growing more rapidly. Given the same production functions, output per worker will be higher in the North because it has a higher capital per worker ratio than the South. b. In the steady state in both countries, capital per worker is constant, so output per worker is constant. The growth rate of output per worker is zero in both North and South. c. In the steady state, total output grows at the rate of population growth. Since South has a higher rate of population growth, the growth rate of total output will be higher in South than in North.

In the Solow model that incorporates changes in the efficiency of labor, the Golden Rule level of capital is the steady state that maximizes:

consumption per worker.

The economies of two countries, Thrifty and Profligate, have the same production functions and depreciation rates. There is no population growth or technological progress in either country. The economies of each country can be described by the Solow growth model. The saving rate in Thrifty is 0.3. The saving rate in Profligate is 0.05. a. In which country is the level of steady-state output per worker larger? Explain. b. In which country is the steady-state growth rate of output per worker larger? c. In which country is the growth rate of steady-state total output greater?

a. Thrifty will have the higher level of steady-state output per worker. With a higher saving rate in Thrifty, there will be more saving, more investment, and, consequently, a higher steady-state capital per worker ratio. For the same production function, the higher capital per worker ratio will produce a higher level of steady- state output per worker. b. In the steady state in both countries, capital per worker is constant, so output per worker is constant. The growth rate of output per worker is zero in both Thrifty and Profligate. c. Since there is no population growth or technological change in the steady state, total output will be constant in both countries. The growth rate of total output will be zero in both Thrifty and Profligate.

The Physiocrats argued that economic growth stems from

agriculture

Most childhood deaths occur due to?

dysentery (caused by bacterial, parasitic, or protozoan infection) and pneumonia

It is probably not possible for a poor country to experience

economic development without economic growth.

If the marginal product of labor (L) is zero when labor = 50, the total product curve at point L = 50 is

flat

If the per-worker production function is y = Ak, where A is a positive constant, then the marginal product of capital:

is constant as k increases.

In the Solow model, if the capital stock is above the steady-state level, then investment

is smaller than depreciation.

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1. Find the steady-state ratio of capital to labor. There is no population growth or labor efficiency growth.

k = 4

In the Solow model, if two economies are identical except for their rates of population growth, then the economy with the higher rate of population growth will have

lower steady-state output per worker.

With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state requires that the marginal product of capital (MPK):

net of depreciation be equal to n + g.

Ancient and most modern cities have developed

next to navigable waterways such as river or ocean.

The underlying production function in the Solow model is defined as Y = A.Kα L1-α, where 0 < α< 1. Suppose we have the same production function, but we set α = 1. Let's call it the Revised Solow Model (RSM). Suppose depreciation is originally less than savings. In the long run, in the original Solow model, higher saving leads to _______ growth rate, but in RSM, higher saving can lead to _______ output.

no change in; higher and higher

In the Solow model, a permanent change in the growth rate of total output can arise from a change in the

rate of technological progress/human capital growth.

If an economy is initially in a steady state and it experiences an increase in its saving rate, then the steady-state capital stock will

rise.

To find steady state values:

s/(delta+n+g) =k/y

If the production function is y = k½, the steady state value of y is (δ = depreciation rate, s = savings rate):

s/δ

If the production function is y = k½, the steady state value of y is (δ = depreciation rate, s = savings rate, n = 0)):

s/δ

If an economy is in a steady state with no population growth or technological change and the marginal product of capital is less than the depreciation rate:

steady-state consumption per worker would be higher in a steady state with a lower saving rate.

The supply curve of labor to industry in the Lewis model is horizontal if there is surplus labor in agriculture. This condition persists as long as

the marginal product of labor is less than the average product of labor in agriculture.

Gross Domestic Product (GDP)

the market value of all goods and services produced within the territory of a country

According to Lewis's model, the dual economy grows only when

the modern sector increases its output share relative to the traditional sector.

If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock:

will be at the same level as in the steady state of the high capital economy.

Lewis dual economies are countries

with a modern manufacturing sector as well as traditional agriculture sector.

If Y = K 0.3L 0.7, then the per-worker production function is:

y = (k)0.3