Production and Growth 6231
150. The president of a poor country has announced that he will implement the following measures
which he claims are designed to increase growth: 1. Reduce corruption in the legal system; 2.
Reduce reliance on market forces because they allocate goods and services in an unfair manner;
3. Restrict investment in domestic industries by foreigners because they take some of the profits
out of the country; 4. Encourage trade with neighboring countries; and 5. Increase the fraction of
GDP devoted to consumption. How many of these measures will have a positive effect on
growth?
a. 1
b. 2
c. 3
d. 4
151. The Economic Development Minister of a country has a list of things she thinks may explain her
country’s low growth of real GDP per person relative to other countries. She asks you to pick the
one you think most likely explains her country’s low growth. Which of the following contributes
to low growth?
a. poorly enforced property rights
b. outward-oriented trade policies
c. policies that permit foreign investment
d. All of the above are correct.
6232 Production and Growth
152. Some poor countries appear to be falling behind rather than catching up with rich countries.
Which of the following could explain the failure of a poor county to catch up?
a. The poor country has outward-oriented trade policies.
b. The poor country allows foreign direct investment.
c. The poor country has poorly developed property rights.
d. All of the above are correct.
153. Which of the following is correct?
a. There is no debate about the effects of higher population growth on economic growth.
b. Natural resources clearly place limits on growth; there is simply no way to reduce either the
amount or type of natural resources needed to produce goods.
c. How much an increase in capital increases a country’s output is independent of that country’s
current level
of capital.
d. Economists argue that outward rather than inward policies are likely to promote economic
growth.
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154. Which of the following public policies would be least likely to result in more rapid economic
growth for a poor or developing country?
a. policies designed to promote economic development in coastal areas
b. policies designed to foster strict enforcement of property rights
c. policies designed to foster free trade
d. inward-oriented policies
155. Other things equal, the likelihood that a country will experience a relatively-high level of income
is greater if the country
a. pursues inward-oriented policies.
b. has natural seaports.
c. minimizes the role of the courts in its economy.
d. enacts policies to encourage consumption and discourage saving.
6234 Production and Growth
Multiple Choice – Section 04: The Importance of Long-Run Growth
1. Economists differ in their views of the role of the government in promoting economic growth. At
the very least, the government should
a. lend support to the invisible hand by maintaining property rights and political stability.
b. limit foreign investment to industries that don’t already exist in the country.
c. impose trade restrictions to protect the interests of domestic producers and consumers.
d. subsidize key industries.
2. Economists differ in their views of the role of the government in promoting economic growth. A
controversial idea is that government should
a. lend support to the invisible hand by maintaining property rights and political stability.
b. lower barriers and impediments to free trade.
c. encourage capital formation.
d. target and subsidize specific industries important for technological progress.
Production and Growth 6235
True/False and Short Answer
1. Real GDP per person in rich countries, such as Germany, is sometimes more than 10 times that of
poor countries like India.
a. True
b. False
2. If per capita real income grows by 2 percent per year, then it will double in approximately 20
years.
a. True
b. False
3. Both the standard of living and the growth of real GDP per person vary widely across countries.
a. True
b. False
6236 Production and Growth
4. According to some estimates, over the last two decades China has had an annual average growth
rate of about 12 percent.
a. True
b. False
5. In some countries in Sub-Saharan Africa real GDP per person has been stagnant for many years.
a. True
b. False
6. International data on real GDP per person gives us a sense of how standards of living vary across
countries.
a. True
b. False
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7. In 2010, income per person in the United States was about 14 times that in India.
a. True
b. False
8. In the United States in 2010 real GDP per person was about $47,000, while in some poor countries
real GDP per person was less than $5,000.
a. True
b. False
9. Over the period 1870–2010, the United States experienced an average annual growth rate of real
GDP per person of about 4 percent per year.
a. True
b. False
6238 Production and Growth
10. Although growth rates across countries vary some, rankings of countries by income remain pretty
much the same over time.
a. True
b. False
11. Over the last 140 years or so, on average Canada’s real GDP per-person grew faster than that of
the U.K.
a. True
b. False
12. Since 1870 Canadian and U.S real GDP per person grew from below to above that in the United
Kingdom. The explanation for this is likely that productivity grew faster in Canada and the U.S.
than in the United Kingdom.
a. True
b. False
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13. Over the period 1890–2010, Japan experienced a 2.65 percent average annual growth rate of real
GDP per person.
a. True
b. False
14. Over the period 1900-2010, Brazil’s rate of economic growth exceeded that of China.
a. True
b. False
15. If it could increase its growth rates slightly, a country with low income would catch up with rich
countries in about ten years.
a. True
b. False
6240 Production and Growth
16. If a country has a higher level of productivity than another, then it also has a higher level of real
GDP.
a. True
b. False
17. International data on the history of real GDP growth rates shows that over the last 120 years or
so, rich countries got richer and poor countries got poorer.
a. True
b. False
18. Productivity can be computed as the number of hours worked divided by output.
a. True
b. False
Production and Growth 6241
19. Journey Motorcycles produced 100 motorcycles using 50 workers who each worked 8 hours a
day. Journey’s productivity was 1/4.
a. True
b. False
20. If Country A produces 7,000 units of goods and services using 700 hours of labor, and if Country
B produces 5,500 units of goods and services using 500 units of labor, then productivity is lower in
Country A than in Country B.
a. True
b. False
21. Indonesians, for example, have a lower standard of living than Americans because they have a
lower level of productivity.
a. True
b. False
6242 Production and Growth
22. Like physical capital, human capital is a produced factor of production.
a. True
b. False
23. Human capital is the term economists use to refer to the knowledge and skills that workers
acquire through education, training, and experience.
a. True
b. False
24. Increases in both human capital per worker and physical capital per worker increase productivity.
a. True
b. False
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25. A forest is an example of a nonrenewable resource.
a. True
b. False
26. Petroleum is an example of a nonrenewable resource.
a. True
b. False
27. Historical trends in the prices of most natural resources compared to prices of other goods indicate
that most natural resources have become scarcer over time.
a. True
b. False
6244 Production and Growth
28. It is possible for a country without a lot of domestic natural resources to have a high standard of
living.
a. True
b. False
29. Constant returns to scale is the point on a production function where increasing inputs will no
longer increase output.
a. True
b. False
30. If a production function has constant returns to scale, then if all inputs double so does production.
a. True
b. False
Production and Growth 6245
31. As capital per worker rises, output per worker rises. However, this increase in output per worker
is smaller at smaller levels of existing capital per worker.
a. True
b. False
32. The same size decrease in the amount of capital stock per worker will cause output per worker to
fall by more in a country with a relatively high level of capital per worker than in a country with a
relatively low level of capital per worker.
a. True
b. False
33. An increase in the saving rate permanently increases the growth rate of real GDP per person.
a. True
b. False
6246 Production and Growth
34. An increase in a country’s saving rate permanently raises its productivity.
a. True
b. False
35. Other things the same, another unit of capital will increase output by more in a poor country than
in a rich country.
a. True
b. False
36. The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely
ever to experience the economic growth rates of wealthier countries.
a. True
b. False
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37. Two countries with the same saving rates must have the same growth rate of real GDP per
person.
a. True
b. False
38. Assuming constant returns to scale, if two countries are otherwise the same, the one that is
poorer grows faster.
a. True
b. False
39. Studies confirm that controlling for other variables such as the percentage of GDP devoted to
investment, poor countries tend to grow at a faster rate than rich countries.
a. True
b. False
6248 Production and Growth
40. When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more
than production in Russia (that is, Russian GDP).
a. True
b. False
41. If your company opens and operates a branch in a foreign country, your company engages in
foreign direct investment.
a. True
b. False
42. Other things the same, domestic investment will increase a country’s real GDP by more than
foreign investment.
a. True
b. False
Production and Growth 6249
43. Foreign direct investment and domestic investment have the same effect on all measures of
economic prosperity.
a. True
b. False
44. An increase in capital increases productivity only if it is purchased and operated by domestic
residents.
a. True
b. False
45. Investment in human capital has opportunity costs, but investment in physical capital does not.
a. True
b. False
6250 Production and Growth
46. Other things the same, an economy’s factors of production are likely to be used more effectively
if there is an economywide respect for property rights.
a. True
b. False
47. A country that made its courts less corrupt and its government more stable would likely see its
standard of living rise.
a. True
b. False
48. If a country made it easier for people to establish and prove the ownership of their property, real
GDP per person would likely rise.
a. True
b. False