Exam 2
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.
H is the
efficiency units of labor used in production .
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.)
the workforce is not skilled. most of the adult population is illiterate. school enrollment is low food shortages affect health
Productivity varies across countries because ___________.
all of the above.
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 thatlong —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.
Which of the following are important determinants of the technology available to an economy?
A and C only.
The level of economic activity is calculated using the income method by ____________.
all of the above.
Over the past 200 years, the U.S. economy has shown ____________.
an increase in income per capita, albeit not an entirely steady one.
Which of the following is an example of a proximate cause of prosperity?
Human capital
Physical capital is
any good, including machines and buildings, used for production.
F is best described as
a relationship between the variables
Y stands for
real GDP
Economists include the word final in the definition of GDP because we ____________.
A and B only.
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.
Production-based accounting is used to estimate GDP by ____________.
A and C only.
Suppose that country A has higher real income per capita than country B. Explain why this does not imply that most citizens of country A have higher real income than most citizens of country B.
A high degree of income inequality in country A may result in most of its citizens having incomes below the average income of country B.
Which of the following may account for variations in real income per capita or real income per worker across countries?
All of the above.
What are the consequences of this decrease in real GDP for real GDP per capita and real GDP per worker?
Both of these items will decrease.
What does Moore's Law predict?
Computer processing power would double approximately every 2 years.
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.
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.
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.
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.
Exponential growth is the ____________.
process by which new growth builds on past growth, leading to a (roughly) constant growth rate.
Why is efficiency of production so important to real GDP?
Higher efficiency translates into higher incomes for workers.
What important factors do GDP estimates leave out? (Check all that apply.)
Home production. Leisure. Capital depreciation. The production of illegal professions.
Every five years, the Bureau of Economic Analysis (BEA) revises past GDP figures and the methodology involved in computing national income. In June 2013, the BEA decided to increase the weighting given to the creation of intellectual property in the national income accounts. This means that the intellectual property involved in the creation of books, movies, photographs, and even greeting cards will be included in GDP. Moreover, the initial cost of producing intellectual property will be treated as a capital investment and future flows of revenue from the book or TV show will be added later on. What are the possible difficulties that the BEA could face with this new approach?
Identifying the qualifying expenditures that lead to the creation of the intellectual property. Deciding how broadly or narrowly to define the concept of intellectual property.
The old Soviet Union devoted enormous resources exclusively to increasing its physical capital stock, and yet eventually the increase in the country's real GDP came to an end. Based on the discussion in the chapter, explain why this was inevitable.
In the absence of technological innovation, massive capital investments yielded diminishing marginal returns.
Productivity is ____________.
the value of output that a worker generates for each hour of work.
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.
Now that we have considered human and physical capital, let's turn to the impact of technology on real income per worker. According to the description in EBE 6, each country's measure of technology is:
Inferred or calculated by assuming that any GDP that can't be accounted for by physical capital or labor in the aggregate production function is accounted for by technology.
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 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.
According to the aggregate production function, which inputs drive production? (Check all that apply.)
Level of technology. Total efficiency units of labor. Physical capital.
You read a newspaper report that compares wages paid to employees at Starbucks in India and in the United Kingdom. At the time, 1 pound was equal to 87 rupees. The report says that Starbucks baristas in India are paid a mere 56 pence an hour, which is lower than the cheapest coffee that Starbucks sells in the United Kingdom. A friend of yours who read the report is appalled by this information and thinks that Starbucks ought to raise its salaries substantially in India. Is your friend necessarily correct?
No, the flaw in the report is that it converts the wages paid in India to pounds using the current exchange rate, but does not account for the cost of living (or the prices of goods) in India.
Could the country achieve a high level of economic development?
No, the country's extractive institutions limit prosperity.
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.
Suppose that there is technological advance from period 1 to period 2 but, at the same time, a decrease in the physical capital stock? Can you say whether real GDP will increase or decrease?
Not really, since the two items have offsetting effects.
What policies can be used to raise real GDP in a country? (Check all that apply.)
Raise physical and human capital. Improve efficiency in the allocation of resources Increase technology.
What does this correlation suggest about real income per capita as a measure of welfare?
Real income per capita is a reliablelong dash—though not perfectlong dash—indicator of human welfare within and across countries.
In the context of this chapter, what is meant by an institution?
Regulations. Laws
Which of the following are included in the United Nations' Human Development Index? (Check all that apply.) There is a positive relationship between the Human Development Index and income per capita.
School enrollment. Income per capita. Literacy rates. Life expectancy.
Which of the following will be considered a final good in the calculation of U.S. GDP? (Check all that apply.)
School supplies purchased by a local school board. Golf outings at courses in North Carolina Defense a equipment purchased by the federal government Foot massages at spas in California. Items are classified as final goods only if they are the end product in a chain of production.
The GDP deflator is calculated using ____________.
StartFraction Nominal GDP Over Real GDP EndFraction times 100 Nominal GDP Real GDP×100
What is the correlation between income per capita and welfare measures like absolute poverty and life expectancy?
Strong positive correlation.
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.
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):
The activities that generate high levels of GDP per capita in 2010 are unlikely to be closely connected with climate and agricultural conditions. We observe lower prosperity in North America than in Peru and India in 1500. Mexico, India, sub-Saharan Africa are relatively poorer today than 500 years ago.
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.
Why is it essential to differentiate between real and nominal growth rates of GDP?
The nominal growth rate combines the effect of price changes along with changes in the production of goods and services and thus gives a less clear indication of the impact on living standards. It is the real growth rate that is meaningful since it indicates the change in the production of goods and services, a very significant source of improved living standards. B and C only.
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.
Suppose you are comparing the income per capita in the United States and Ghana. You try two approaches. In the first approach, you convert the Ghana values into U.S. dollars using the current exchange rate between the U.S. dollar and the Ghanaian cedi. In the second approach, you also convert both values to U.S. dollars using the purchasing power parity-adjusted exchange rate. Which approach is likely to give you a more accurate picture of the living standards in both countries?
The second approach, because it takes into account the relative costs for each country.
What is the key difference between the Consumer Price Index (CPI) and the GDP deflator?
The two indexes measure price changes for different "baskets" of products.
Which of the following are not included in GDP but probably should be? (Check all that apply.)
The value of externalities. Home production. The value of leisure Transactions in the underground economy
Which of the following is one of the three important elements that define institutions?
They are determined by individuals. they determine incentives They place constraints on behavior
Why would a government undertake policies that would adversely affect the lives of its citizens?
To maintain its power.
Complete the formula for the aggregate production function.
Y = F (K, H).
In this question, we will use what you learned in the second part of the chapter to compare the performance of an economy in two different time periods, as its physical capital stock and efficiency units of labor change. Suppose that from period 1 to period 2, the unemployment rate in the economy increases. Everything else remains unchanged. The total efficiency units of labor will decrease because less workers are employed . What are the consequences of this increase in unemployment for GDP?
Y1 > Y2.
The national income accounting identity associated with the expenditure-based accounting method is represented by ___________.
Y=C+I+G+X−M.
Is Moore's Law borne out by historical data?
Yes, Moore's prediction has been remarkably accurate.
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.
The aggregate production function describes the relationship between the ____________.
aggregate GDP of a nation and its factors of production.
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.
Human capital is
each person's stock of skills to produce output or economic value
When government statisticians gather and analyze data on the purchases of goods and of goods and services produced in the domestic economy, they are measuring GDP using the ____________.
expenditure-based accounting method.
In 1950, GDP per capita in Germany was only $4,281. GDP per capita in Argentina that same year was $4,987. So, in 1950 Argentina was actually "richer" in per capita terms than Germany. By 1992, however, GDP per capita in Germany was $19,351, whereas GDP per capita in Argentina was only $7,616. (Note: All figures in this problem are given in constant, 1990 dollars.) Between 1950 and 1992, per capita GDP in Germany increased by 352.0 percent while over the same period in Argentina it increased by 52.7 percent. (Round both answers to one decimal place.) 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.)
generated faster improvements in the efficiency of its labor. initiated and used more rapid advances in technology. accumulated physical capital at a more rapid pace.
When government statisticians gather and analyze data on the income of various agents in the domestic economy, they are measuring GDP using the ____________.
income-based accounting method.
According to the aggregate production function, GDP increases when a nation ____________. (Check all that apply.)
increases the human capital of its workers, H. increases its stock of physical capital, K. improves its technology, A.
Based on your understanding of the chapter, poverty can best be reduced by ____________. (Check all that apply.)
increasing international trade. improving the knowledge and technologies available in the world economy.
To say that private property rights are well-enforced in an economy means that ____________.
individuals can securely hold assets.
Factors of production are the ____________.
inputs used to produce other goods and services in an economy.
Physical capital accumulation is driven by ____________.
investment
In general, the subsistence level ____________.
is unique in each environment.
The subsistence level is the ___________.
minimum level of income per person that is generally necessary for an individual to survive.
The return-to-entrepreneurship curve shows the ____________.
number of entrepreneurs with at least a particular level of returns.
K is the
physical capital stock of the nation
Productivity varies across countries because of differences in ____________. (Check all that apply.)
physical capital. technology. human capital.
A country's gross national product would exceed its gross domestic product when the ____________.
production of domestically-owned factors operating abroad exceeds the production of foreign-owned factors operating in the United States.
A country's gross domestic product would exceed its gross national product when the ____________.
production of foreign-owned factors operating in the domestic economy exceeds the production of domestically-owned factors operating abroad.
When government statisticians gather and analyze data on the value added by the firms in the domestic economy, they are measuring GDP using the ____________.
production-based accounting method.
Private property rights foster economic development by ____________.
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.
Technology is
the ability to use labor and capital more efficiently
Fundamental causes of Burondo's lack of prosperity are ____________. (Check all that apply.)
the geography is not favorable. the agricultural industry is collectivized. the government is an extractive political institution. the farmer have limited incentives to increase output
Economic growth is ____________.
the increase in income (GDP) per capita of an economy.
Give an intuitive explanation of the concept of "efficiency of production." Efficiency of production is the ability of the economy to produce ____________.
the maximal amount of output at a given cost or for given amounts of the factors of production
According to the geography hypothesis, incomes in poor countries are ____________.
unlikely to be changed, because climate is largely out of their control.
The opportunity cost of entrepreneurship is the ____________.
value to a potential entrepreneur of her best alternate activity.
Which of the following news stories (all published in early 2014) would typically be studied in macroeconomics? (Select all that apply.)
"We Believe Inflation Should Rule Monetary Policy." "Expectations High for March Employment." "What If Economic Growth Is No Longer Possible?"
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
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.
Suppose that the GDP in current dollars for Polonia is higher than Ruritania's GDP. However, using purchasing power parity-adjusted dollars, Ruritania's GDP is higher than Polonia's GDP. Based on this information, you can conclude ___________.
Ruritania's standard of living is likely to be better than Polonia's.