Production and Growth 6191
57. The catch-up effect refers to the idea that
a. saving will always catch-up with investment spending.
b. it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
c. population eventually catches–up with increased output.
d. if investment spending is low, increased saving will help investment to “catch-up.”
58. The traditional view of the production process is that capital is subject to
a. diminishing returns, so that other things the same, real GDP in poor countries should grow at a
faster rate than in rich countries.
b. diminishing returns, so that other things the same, real GDP in poor countries should grow at a
slower rate than in rich countries.
c. increasing returns, so that other things the same, real GDP in poor countries should grow at a
faster rate than in rich countries.
d. increasing returns, so that other things the same, real GDP in poor countries should grow at a
slower rate than in rich countries.
6192 Production and Growth
59. The logic behind the catch–up effect is that
a. workers in countries with low incomes will work more hours than workers in countries with
high incomes.
b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of
capital.
c. new capital adds more to production in a country that doesn’t have much capital than in a
country that already has much capital.
d. None of the above is correct.
60. Country A has real GDP per person of 100,000 while country B has real GDP per person of
200,000. All else constant, country A will eventually have a higher standard of living than country
B if
a. the level of saving per person is 10,000 in country A and 10,000 in country B.
b. the level of saving per person is 12,000 in country A and 15,000 in country B.
c. Both of the above are correct.
d. None of the above are correct.
Production and Growth 6193
61. Country A has real GDP per person of 250,000 while Country B has real GDP per person of
500,000. All else constant, Country A will eventually have a higher standard of living than Country
B if
a. the level of saving per person is 5.000 in Country A and 7,500 in Country B.
b. the level of saving per person is 3,000 in Country A and 6,000 in Country B.
c. Both of the above are correct.
d. None of the above are correct.
62. Which of the following countries benefited significantly from the catch-up effect in the last half of
the twentieth century?
a. Ethiopia
b. the United States
c. Canada
d. South Korea
6194 Production and Growth
63. Which of the following is consistent with the catch-up effect?
a. The United States had a higher growth rate before 1900 than after.
b. After World War II the United States had lower growth rates than war-ravaged European
countries.
c. Although the United States has a relatively high level of output per person, its growth rate is
rather modest compared to some countries.
d. All of the above are correct.
64. Over the period 1960-1990,
a. South Korea had a higher growth rate than the United States because it had a higher ratio of
investment to GDP.
b. the United States had a higher growth rate than South Korea because it had a higher ratio of
investment to GDP.
c. South Korea had a higher growth rate than the United States even though it had a similar ratio
of investment to GDP.
d. the United States had a higher growth rate than South Korea even though it had a similar ratio
of investment to real GDP.
Production and Growth 6195
65. Fretonia and Libstien are the same except Fretonia has a larger capital stock. Both countries
undertake policies that raise their saving rates to the same higher level. We would expect that
a. both countries would have permanent increases in their growth rates, but the increase would
initially be larger in Fretonia.
b. both countries would have permanent increases in their growth rates, but the increase would
initially be smaller in Fretonia.
c. both countries would have temporary increases in their growth rates, but the increase would be
larger in Fretonia.
d. both countries would have temporary increases in their growth rates, but the increase would be
smaller in Fretonia.
66. Fretonia and Libstien are the same except Fretonia has a larger capital stock. Both countries
undertake policies that raise their saving rates to the same higher level. We would expect that
a. both countries would have permanent increases in their growth rates, but the increase would
initially be larger in Fretonia.
b. both countries would have permanent increases in their growth rates, but the increase would
initially be smaller in Fretonia.
c. both countries would have temporary increases in their growth rates, but the increase would be
larger in Fretonia.
d. both countries would have temporary increases in their growth rates, but the increase would be
smaller in Fretonia.
6196 Production and Growth
67. If an American-based firm opens and operates a new clothing factory in Honduras, then it is
engaging in
a. foreign portfolio investment.
b. foreign financial investment.
c. foreign direct investment.
d. indirect foreign investment.
68. If an American-based firm opens and operates a factory in China, then it is engaging in
a. foreign portfolio investment.
b. foreign financial investment.
c. foreign direct investment.
d. indirect foreign investment.
69. In the 1800s, Europeans purchased stock in American companies that used the funds to build
railroads and factories. The Europeans who did this engaged in
a. foreign portfolio investment.
b. indirect domestic investment.
c. foreign direct investment.
d. foreign indirect investment.
Production and Growth 6197
70. In recent decades Americans have increased their purchase of stocks of foreign-based
companies. The Americans who have bought these stocks were engaged in
a. foreign portfolio investment.
b. indirect domestic investment.
c. foreign direct investment.
d. foreign indirect investment.
71. Suppose that an American opens and operates a candy factory in Finland. This is an example of
a. foreign direct investment. American saving is used to finance Finish investment.
b. foreign direct investment. American saving is used to finance American investment.
c. foreign portfolio investment. American saving is used to finance Finish investment.
d. foreign portfolio investment. American saving is used to finance American investment.
72. Suppose that an American company opens and operates a restaurant in Ireland. This is an
example of
a. foreign direct investment. American saving is used to finance Irish investment.
b. foreign direct investment. American saving is used to finance American investment.
c. foreign portfolio investment. American saving is used to finance Irish investment.
d. foreign portfolio investment. American saving is used to finance American investment.
6198 Production and Growth
73. Foreign saving is used for domestic investment when foreigners engage in
a. foreign direct investment.
b. foreign portfolio investment.
c. either foreign direct investment or foreign portfolio investment.
d. None of the above is correct.
74. If WarmWear, a U.S.manufacturer of winter clothing, opens a new factory in Austria, then
a. Austrian GNP increases by more than Austrian GDP, because GDP includes income earned
by foreigners working in Austria.
b. Austrian GNP increases by more than Austrian GDP, because GDP excludes income earned
by foreigners working in Austria.
c. Austrian GNP increases by less than Austrian GDP, because GDP includes income earned by
foreigners working in Austria.
d. Austrian GNP increases by less than Austrian GDP, because GDP excludes income earned by
foreigners working in Austria.
Production and Growth 6199
75. Suppose a U.S. automaker builds and operates a new factory in Italy. Future production from
such an investment will
a. increase Italian GDP more than it increases Italian GNP.
b. increase Italian GNP more than it increases Italian GDP.
c. have no affect on Italian GNP, but will increase Italian GDP.
d. have no affect on either Italian GDP or GNP.
76. Suppose Japanese-based Toshiba Corporation builds and operates a new computer factory in the
United States.
Future production from such an investment will
a. increase U.S. GNP more than it increases U.S. GDP.
b. increase U.S. GDP more than it increases U.S. GNP.
c. have no affect on U.S. GNP, but will increase U.S. GDP.
d. have no affect on U.S. GNP or GDP.
6200 Production and Growth
77. The opening of a new American-owned factory in Algeria would tend to increase Algeria‘s GDP
more than it increases Algeria’s GNP because
a. some of the income from the factory accrues to people who do not live in Algeria.
b. gross domestic product is income earned within a country by both residents and nonresidents,
whereas gross national product is the income earned by residents of a country while producing
both at home and abroad.
c. all of the income from the factory is included in Algeria‘s GDP.
d. All of the above are correct.
78. If a Japanese company opens a new factory in South Korea, it makes
a. foreign direct investment. The factory will make a bigger impact on South Korea’s GDP than
on its GNP.
b. foreign direct investment. The factory will make a bigger impact on South Korea’s GNP than
on its GDP.
c. foreign portfolio investment. The factory will make a bigger impact on South Korea’s GDP
than on its GNP.
d. foreign portfolio investment. The factory will make a bigger impact on South Korea’s GNP
than on its GDP.
Production and Growth 6201
79. When Chile experiences investment from abroad, it experiences, as a result,
a. an increase in productivity.
b. a decrease in Gross National Product (GNP).
c. lower wages for Chilean workers.
d. None of the above is correct.
80. If companies from foreign countries build and operate factories in China, then China’s productivity
a. and the wages of Chinese workers increase.
b. increases but the wages of Chinese workers decrease.
c. decreases but the wages of Chinese workers increase.
d. and the wages of Chinese workers decrease.
81. Investment from abroad
a. is a way for poor countries to learn the state-of-the-art technologies developed and used in
richer countries.
b. is viewed by economists as a way to increase growth.
c. often requires removing restrictions that governments have imposed on foreign ownership of
domestic capital.
d. All of the above are correct.
6202 Production and Growth
82. An organization that tries to encourage the flow of investment to poor countries is the
a. World Bank.
b. Organization of Less Developed Countries.
c. Alliance of Developing Countries.
d. International Development Alliance.
83. A country’s human capital increases
a. if its workers become better educated or healthier.
b. only if its workers become better educated.
c. only if its workers become healthier.
d. None of the above is correct.
84. Investment in
a. physical capital, unlike investment in human capital, has an opportunity cost.
b. physical capital, like investment in human capital, has an opportunity cost.
c. human capital is particularly attractive because it involves no externalities.
d. human capital has been shown to be relatively unimportant, relative to investment in physical
capital, for a country’s long-run economic success.
Production and Growth 6203
85. Which of the following is generally an opportunity cost of investment in human capital?
a. future job security
b. forgone present wages
c. increased earning potential
d. All of the above are correct.
86. In the U.S., each additional year of schooling has historically raised a person’s wage on average
by about
a. 2 percent.
b. 5 percent.
c. 10 percent.
d. 15 percent.
87. Educational attainment tends to be
a. low in countries with high population growth.
b. low in countries with low population growth.
c. high in countries with high population growth.
d. None of the above are true.
6204 Production and Growth
88. In the U.S., each additional year of schooling has historically raised a person’s wage on average
by about
a. 5 percent. In less developed countries the gap between the wages of educated and uneducated
workers is smaller.
b. 10 percent. In less developed countries the gap between the wages of educated and
uneducated workers is smaller.
c. 5 percent. In less developed countries the gap between the wages of educated and uneducated
workers is larger.
d. 10 percent. In less developed countries the gap between the wages of educated and
uneducated workers is larger.
89. The return to schooling for society is higher than the return to schooling for the individual if
a. the concept of diminishing returns applies to education.
b. the concept of constant returns to scale applies to education.
c. human capital conveys positive externalities.
d. investment in human capital involves no opportunity costs.
Production and Growth 6205
90. Educated people may generate ideas that increase production. These ideas
a. produce a return to society from education that is greater than the return to the individual.
b. could justify government subsides for education.
c. are external benefits of education.
d. All of the above are correct.
91. Which of the following is an example of the “brain drain?”
a. A country’s most highly educated workers emigrate to rich countries.
b. A country has such a poor educational system that human capital falls over time.
c. The population of a country grows so fast that the educational system can‘t keep up.
d. A country steals patented technology from another country.
92. Suppose a person receives an education in her home country. Which of the following will tend to
make the increase
in GDP of the person’s home country larger than the increase in this person’s income?
a. externalities and brain drain
b. externalities but not brain drain
c. brain drain but not externalities
d. neither externalities nor brain drain
6206 Production and Growth
93. Economist Robert Fogel focused on which of the following factors as one determinant of long–run
economic growth?
a. education
b. research and development
c. nutrition
d. trade restrictions
94. According to research by Robert Fogel, what proportion of the British population in 1780 was so
malnourished that they could not perform manual labor?
a. 5 percent
b. 10 percent
c. 20 percent
d. 25 percent
Production and Growth 6207
95. According to research by Robert Fogel, people in Britain grew taller because of
a. genetics. However this increase in height had no effect on productivity.
b. genetics. This increase in height is associated with higher productivity.
c. higher caloric intake. However, this increase in height had no effect on productivity.
d. higher caloric intake. This increase in height is associated with higher productivity.
96. According to research by Robert Fogel, what proportion of the increase in the standard of living in
Britain between 1790 and 1980 can be accounted for by greater caloric intake?
a. 10 percent
b. 20 percent
c. 30 percent
d. 40 percent
6208 Production and Growth
97. Which of the following terms is used to refer to the ability of people to exercise authority over the
resources they own?
a. natural rights
b. property rights
c. input control
d. collective control
98. Which of the following statements is correct?
a. In an economy-wide sense, property rights are an important prerequisite for the price system to
work.
b. Property rights give people the ability to exercise authority over the resources they own.
c. Based on the available evidence, the existence of well-established and well-enforced property
rights appears to be associated with an enhanced standard of living.
d. All of the above are correct.
99. In some countries it is time consuming and costly to establish ownership of property. Reforms to
reduce these costs would likely
a. have no affect on either real GDP nor productivity
b. raise real GDP and productivity.
c. raise real GDP but not productivity.
d. raise productivity but not real GDP.
Production and Growth 6209
100. Government corruption
a. impedes the coordinating power of markets and discourages investment.
b. impedes the coordinating power of markets but does not discourage investment.
c. does not impede the coordinating power of markets, but does discourage investment.
d. can neither impede the coordinating power of markets nor discourage investment.
101. The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political
opponents, and he has given the farms to his friends. His friends don’t know much about farming.
The courts in Turan have ruled that the seizures are illegal, but the dictator has ignored the
rulings. Other things equal, we would expect that the growth rate in Turan will
a. fall temporarily, but will return to where it was when the new owners learn how to farm.
b. increase because the total amount of human capital in the country will increase as the new
owners learn how to farm.
c. fall and remain lower for a long time.
d. not be affected unless widespread civil disorder or civil war results.
6210 Production and Growth
102. The dictator of a country requires that companies planning to open or expand must pay a large
fee to file an application one year prior to building new factories or expanding existing ones.
Other things the same, in the long run this requirement would
a. reduce real GDP per person and productivity.
b. reduce real GDP per person but not productivity.
c. reduce productivity but not real GDP per person.
d. None of the above is correct.
103. Suppose that a new government is elected in Eurnesia. The new government takes steps toward
improving the court system and reducing government corruption. The citizens of Eurnesia find
these efforts credible and outsiders believe these changes will be effective and long lasting.
These changes will probably
a. raise real GDP per person and productivity in Eurnesia.
b. raise real GDP per person but not productivity in Eurnesia.
c. raise productivity but not real GDP per person in Eurnesia.
d. raise neither productivity nor real GDP per person in Eurnesia.