Quiz 4

New Growth Theory

A model of long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system

Economic Growth Model

A model that explains growth rates in real GDP per capita over the long run

Technological Change

A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

High-Income/Industrial/Developed Countries

A sovereign state that has a high quality of life, developed economy and advanced technological infrastructure relative to other less industrialized nations

Developing Countries

A sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries

Newly Industrializing Countries

A term describing primarily East Asian nations that started experiencing rapid economic growth in the 1980s and 1990s

If A increased, which of the following would change? A. Y/L B. K/L

A. Y/L Recall how we use the per worker production function -- Y/L depend upon K/L and A. That is, K/L and A feed into Y/L.

Economic growth is likely to be ___ if the government fixed or set the price of important goods to make them affordable for consumers. A. hindered B. aided C. neither of the above

A. hindered Flexible prices aid economic growth.

Which of the following is the smallest in the U.S. economy? A. real GDP per person B. Y/L

A. real GDP per person Recall that real GDP per person this is about $55,000 and it is total U.S. income divided by the number of people in the country. It roughly measures well-being. At the same time Y/L is production per worker (also known as labor productivity). Its value is about $111,000 and is computed by taking total production (Y) and dividing by the number of workers (L). Y/L would be larger than real GDP per person as real GDP is in the numerator for both (production for the first and income for the second) but the denominator is smaller in the first case as there are fewer workers than people in the country. Finally, note that as Y/L grows (each worker produces more), then GDP per person will grow as workers will be earning more.

If the rule of law improved in a country, K would most likely ___ A. rise B. might rise or fall C. fall

A. rise If firms felt that their capital would not be taken by the government or crooks, they are more like to invest.

If a country started to use markets, A would most likely ___. A. rise B. might rise or fall C. fall

A. rise Recall that A measures technology. With the use of market, firms are more likely to have an incentive to develop better capital and better ways of producing goods.

Markets seem to be an essential ingredient for sustained economic growth A. true B. false

A. true Every country that has had sustained economic growth has used markets to organize its economy.

For the sake of this question, say that China's long-run growth rate was cut by half. In two generations, this change most likely ___ be noticed. A. would B. would not

A. would Recall how small differences in a country's growth rate lead to big differences over decades and beyond.

Knowledge Capital

Accumulated knowledge, increased with research and development

Physical Capital

An apparatus used to produce a good or service such as a computer or factory

Secular Stagnation

An expanded period of slow growth

The long run rate of growth of the U.S. is about ___. A. 1% B. 2% C. 8% D. 9%

B. 2% We computed this value in class.

If an economy grows at 10% a year, it would double in size in about ___ . A. 1 year B. 7 years C. 10 years D. 70 years

B. 7 years Here you use the Rule of 70; you would have 70/10 = 7 -- this means that real GDP doubles in about 7 years when growing at 10% a year. Keep in mind that the Rule of 70 can be used for the growth of anything.

Which of the following leads to diminishing returns? A. increases in the money supply B. adding more of existing types of capital C. improving human capital D. finding better ways to organize production

B. adding more of existing types of capital More and more of an input to production (like capital) leads to diminishing returns. Note that this is analyzed by holding constant other inputs. Thus, a pizza shop will have diminishing returns to pizza ovens for a given, fixed number of workers.

Which of the following government actions would be the most harmful to economic growth? A. granting patents B. fixing prices C. reducing corruption D. increasing protecting for property rights

B. fixing prices Flexible prices help economies work more efficiently. The provide signals and incentives. For example, firms need skilled workers these days and are willing to pay for them and as a result the pay of college grads is much higher than high school grads. As a result, more go to college. While this is a wage, it illustrates the idea.

Labor productivity is best described as ___. A. the skills of one worker B. how much one worker can produce C. real GDP D. nominal GDP

B. how much one worker can produce This is the straight definition from class.

Human health generally ___ as economies grow. worsens A. stays the same B. improves

B. improves Please see the textbook on this one.

If A rose and K/L declined, then Y/L would ___. A. rise B. might rise or fall C. fall

B. might rise or fall If A rose, the Y/L would increase and if K/L declined Y/L would fall. Thus, without more information, it is impossible to say what would happen.

Say 50 years ago the CPI had a value of 70 and today's value is 236.1. Would (70/236.1)50 - 1 be the average rate of inflation over these years? A. yes B. no

B. no It would be (236.1/70)(1/50) - 1 (and note that you'd multiply by 100 to make it a percent).

If economic growth was zero-sum, real GDP per person would ___ as economies grow. A. fall B. stay the same C. rise

B. stay the same If growth came from one country taking GDP from another (that would be zero-sum), then real GDP average across the world would be constant. As in the example in class, it would be like a poker game -- all you're doing is determining who gets the chips. Economic growth is a bit like poker chips materializing on the poker table.

If real GDP doubled in 10 years then you know that ___. A. the rate of inflation is about 7 percent B. the rate of economic growth is about 7 percent C. the rate of inflation is about 10 percent D. the rate of economic growth is about 10 percent

B. the rate of economic growth is about 7 percent First, changes in real GDP measure economic growth, not inflation. Second, this is an application of the Rule of 70 as deals with GDP doubling. Recall the Rule of 70: 70/growth rate = approximate time to double. If real GDP doubled in 10 years, then the rate of economic growth would be 7 years as 70/7 = 10.

Three Main Sources of Technological Change

Better machinery and equipment, increases in human capital, better means of organizing and managing production

The Wealth of Nations

Book written by Adam Smith under the influence of the ideas of Enlightenment thinkers who argued that a good society was one where everyone was free and politically equal. Smith believed that the best measure of an economy was its ability to produce goods and services for the average person and that freeing individuals to pursue wealth however they chose would result in the greatest good for the greatest number

Which of the following is not technology? A. workers attending a conference on using Microsoft Access B. Starbucks adding an improved latte machine C. UPS adding more trucks D. McDonalds finding a better way to serve customers

C. UPS adding more trucks Option C says nothing about the trucks being better, while all the other options are clearly examples of technology.

Consider the per-worker production function. On the vertical axis you'll find ___ and on the horizontal axis you'll find ___. A. Y, K B. K, Y C. Y/L, K/L D. K/L, Y/L

C. Y/L, K/L This is straight from class on how this graph is set up.

Which of the following is the most remarkable element of the Chinese economy? A. its level of real per capita GDP B. its inflation rate C. its growth rate D. its unemployment rate

C. its growth rate We computed this number in class. While not mentioned then, no large country has grown so fast for so long.

For the U.S., which matters more for its long-run growth? A. increases in the money supply (the amount of money in the economy) B. more K/L C. more technology

C. more technology As in class, increases in technology are the most important. First, recall the idea of diminishing returns. Second, recall the calculation that found that over the last two generations that if we only increased K/L then Y/L increased by a relatively small amount. But, if only technology increased over this time, Y/L increased by a larger amount.

Consider the per-worker production function. If technological change occurs (measured by an increase in total factor productivity), then ___ A. the curve shifts down B. you move right along the curve C. the curve shifts up D. you move left along the curve

C. the curve shifts up This is another example of technology shifting this curve up.

Say that over 10 years real GDP in a foreign country grew from 1 billion to 5 billion. Then, you used (5 billion / 1 billion)10 - 1 to calculate average annual growth rate. Which of the following is wrong with the use of this formula? A. you don't subtract 1 B. the division should be 1 billion / 5 billion C. the exponent is incorrect

C. the exponent is incorrect The exponent should be 1/10 and not 10.

Information Technology (IT)

Computers, software, cellphones, and related innovations

Across the economy the following take place: (i) people have more education, (ii) firms add machines that are more efficient (iii) firms import ideas to run factories more efficiently. For how many of the above listed reasons does the curve in the per-worker production function shift up? A. 0 B. 1 C. 2 D. 3

D. 3 All three of these are technology and they shift the curve up. If more of existing types of machines were added then you move to the right along the curve.

If a country has a high GDP per capita, which of the following is most likely for that country? A. total factor productivity is among the world's lowest B. the legal system does not protect property rights C. workers are poorly educated D. K/L is among the highest in the world

D. K/L is among the highest in the world K/L is the only possible answer. First, in the per-worker production function, it suggest a large Y/L. Second, the other options all would lead to a country being poor.

If college and high school graduates have more skills than earlier graduates of years past, then the ___ . A. economy moves right on the per-worker production function B. economy moves left on per-worker production function C. per-worker production function shifts down D. per-worker production function shifts up

D. per-worker production function shifts up If there is more capital per worker, then one moves to the right on this curve. If anything else changes (and here we focus on technology: better capital, more human capital, or better organized businesses), the curve this shifts up as Y/L grows without any change in K/L (the variable on the horizontal axis). In this case, the curve shifts up as more skilled workers mean that for the same K/L, each worker is more productive (i.e. Y/L grows).

Which of the following is the best reason for the difference in economic growth between North and South Korea? A. the capital to labor ratio varies B. GDP per person varies C. language differences D. the use of markets

D. the use of markets As in class, the use of markets. Markets provide many incentives for long-term growth.

Rising real incomes are due to ___. A. the minimum wage B. a rising number of workers in the economy C. a falling number of workers in the economy D. workers becoming more productive

D. workers becoming more productive Recall how in class we described that the U.S. is a rich country (to be precise, GDP per person is roughly $68,000 a person (and here we're interpreting GDP as income)) and that this is due to highly productive workers. The productive workers earn a lot and this leads to high incomes.

Firm Level

Economic variables at the business level

What is required for increasing the standard of living

In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change

Why do growth rates matter so much?

In the long run, small differences in economic growth rates result in big differences in living standards

Trade Secret

Occurs when a firm may try to keep the results of its research a trade secret without patenting it

Free Ride

Occurs when firms benefit from the results of research and development they did not pay for

Just-In-Time System

Production method that involves assembling goods from parts that arrive at the factory at exactly the time workers need them. With this system, firms require fewer workers to store and keep track of parts in the factory, so the quantity of goods produced per hour worked increases

Three ways government policy can increase knowledge capital

Protecting intellectual property with patents and copyrights, supporting research and development, subsidizing education

Law of Diminishing Returns

States that as we add more of one input—in this case, capital—to a fixed quantity of another input—in this case, labor—output increases by smaller additional amounts

Human Capital

The accumulated knowledge and skills that workers acquire from education and training or from their life experiences.

Industrial Revolution

The application of mechanical power to the production of goods, beginning in England around 1750

Patent

The exclusive legal right to produce a product for a period of 20 years from the date the patent application is filed with the government

Long-Run Economic Growth

The process by which rising productivity increases the average standard of living

Labor Productivity

The quantity of goods and services that can be produced by one worker or by one hour of work.

Per-Worker Production Function

The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

Efficient Allocations/Private Incentives

These are based on the incentives that one sees in free markets as prices vary

Per-worker production function

Y/L = (A x K/L)^.3 A = Technology/Total Factor Productivity K/L = Capital per Worker Y/L = Output per Worker Y = Real GDP L = Labor (# of Workers) K = Capital

Real GDP per person calculation

Y/Pop = L/Pop x Y/L Y/L = Output per Worker Y/Pop = real GDP per Capita L/Pop = Labor Participation Y = Real GDP L = Labor (# of Workers) K = Capital