Chapter 08 – Economic Growth
8-1
CHAPTER 08
Economic Growth
1. Identify the two major ways economic growth is measured.
2. Suppose an economy’s real GDP is $50,000 in year 1 and $55,000 in year 2. What is the growth rate of its
GDP? Assume that population was 100 in year 1 and 105 in year 2. What is the growth rate in GDP per
capita?
3. Suppose an economy’s real GDP is $100,000 in year 1 and $110,000 in year 2. What is the growth rate of its
GDP? Assume that population was 200 in year 1 and 205 in year 2. What is the growth rate in GDP per
capita?
4. Explain why even small changes in the rate of economic growth are significant. Use the “rule of 70” to
demonstrate the point.
5. If a nation’s productivity grows by 3% rather than 1.5% over many years, what will be the difference in the
nation’s standard of living? Explain.
6. Summarize the historical growth record of the United States over the past 50 years in terms of real GDP
growth and in terms of real GDP per capita growth. What three qualifications should be made about these
growth rates?
7. What are the main characteristics of modern economic growth? What is the effect of modern economic
growth on the cultural, social and political arrangements of our times?
8. What is the main cause of the uneven distribution of economic growth seen around the world?
9. Are countries that began modern economic growth more recently doomed to be permanently poorer than the
countries that began modern economic growth in earlier periods? Explain.
10. (Consider This) Why do small differences in the rate of economic growth produce large differences in the
size of the economy over time? Illustrate with an example.
11. In a recent year GDP per capita in the United States was much higher than GDP per capita in France. Why
would there be such a large difference in GDP per capita between two rich leader countries?
12. Give at least three reasons why U.S. workers supply so much more labor than workers in France and other
rich leader countries.
13. Name at least four institutional structures that promote and sustain modern economic growth. What other
factors also influence a nation’s capacity for economic growth?
14. (Consider This) What are the benefits and costs to Indian citizens of allowing Indian companies to copy and
sell patent-protected drugs developed by U.S. companies?
15. Summarize the four supply factors in economic growth.
16. Explain the demand factor in economic growth.
17. What is the efficiency factor?
18. What is the relevance of productive and allocative efficiency to the growth process?
Chapter 08 – Economic Growth
8-2
19. The achievement of full employment is a sufficient condition for the achievement of economic growth.
Evaluate.
20. Use the diagram below to answer the questions.
(a) If the economy’s production possibilities curve is shown by curve AB, then draw in a new curve CD
which indicates positive economic growth.
(b) What are some of the factors which could cause a shift from AB to a new curve EF?
(c) If the economy illustrated by production possibilities curve AB is producing at point 4, what economic
problem does this represent for this economy?
21. How would the Great Recession of 2007–2009 be pictured in a typical production possibilities curve?
22. Define worker-hours and labor productivity. What factors are behind labor productivity?
23. Assume that an economy has 2000 workers, each working 3000 hours per year. The average real output
per worker-hour is $10. What will the total output or real GDP be? Explain.
24. Assume that an economy has 5000 workers, each working 2500 hours per year. The average real output
per worker is $20.
(a) What would the total output or real GDP be?
(b) Suppose in year 2 the number of workers increased to 5500. What would real GDP be? What would
the growth rate be?
(c) Suppose in year 3 the average real output per worker declined to $15. What would real GDP be?
What would the growth rate be?
25. Assume that an economy has 9000 workers, each working 2000 hours per year. The average real output
per worker-hour is $20. What will the total output or real GDP be? Explain.
26. Suppose an economy’s real GDP is $125 billion in year 1 and $130 billion in year 2. What is the growth
rate of its GDP?
27. Suppose an economy’s real GDP is $700 billion in year 1 and $718 billion in year 2. What is the growth
rate of its GDP?
28. Which is more important—labor quantity or labor productivity—as a source of economic growth in the
United States? Explain.
29. Give the approximate importance of productivity as a source of economic growth in the United States and
list the various sources which account for this productivity growth and their relative importance.
Chapter 08 – Economic Growth
8-3
30. Discuss the meaning of the statement: “Human history teaches us that economic growth springs from
better recipes, not just more cooking.”
31. How are technological advance and capital formation related?
32. (Consider This) How has the influx of women into the paid labor force over the past half century
influenced economic growth? State at least three of the six reasons given for the increase in the number of
women in the paid workforce over the past half century.
33. How does investment in capital goods and infrastructure contribute to economic growth?
34. What is meant by human capital and how can it be used to promote economic growth?
35. What is meant by economies of scale and what is the importance of this concept to economic growth?
36. How has improved resource allocation stimulated economic growth?
37. Describe the trend in the rate of productivity from 1973 to 1995 and then from 1995 to 2009.
38. How has the development of the microchip and information technology contributed to increased
productivity?
39. What has been the effect of new firms and increasing profits on productivity?
40. What are the sources of increasing returns and economies of scale of the recent increase in trend rate
productivity experienced in the U.S.?
41. What are the macroeconomic implications from the recent increase in trend rate productivity?
42. Does the recent increase in trend rate productivity experienced in the U.S. mean that the business cycle is
dead?
43. What are two “safe” or reasonable conclusions that can be drawn on about the acceleration in productivity
growth?
44. Offer a skeptical perspective on the long-term economics of the recent increase in trend rate productivity.
45. Summarize the antigrowth view of economic growth.
46. Offer a defense of economic growth.
47. Are economic growth and progress synonymous? How might they differ?
48. (Last Word) How has economic growth changed in China over the past 25 years? Are there any lingering
problems economic growth has not solved?
Chapter 08 – Economic Growth
8-4
B. Answers to Short-Answer, Essays, and Problems
1. Identify the two major ways economic growth is measured.
2. Suppose an economy’s real GDP is $50,000 in year 1 and $55,000 in year 2. What is the growth rate of its
GDP? Assume that population was 100 in year 1 and 105 in year 2. What is the growth rate in GDP per
capita?
3. Suppose an economy’s real GDP is $100,000 in year 1 and $110,000 in year 2. What is the growth rate of its
GDP? Assume that population was 200 in year 1 and 205 in year 2. What is the growth rate in GDP per
capita?
4. Explain why even small changes in the rate of economic growth are significant. Use the “rule of 70” to
demonstrate the point.
5. If a nation’s productivity grows by 3% rather than 1.5% over many years, what will be the difference in the
nation’s standard of living? Explain.
6. Summarize the historical growth record of the United States over the past 50 years in terms of real GDP
growth and in terms of real GDP per capita growth. What three qualifications should be made about these
growth rates?
Chapter 08 – Economic Growth
8-5
7. What are the main characteristics of modern economic growth? What is the effect of modern economic
growth on the cultural, social and political arrangements of our times?
8. What is the main cause of the uneven distribution of economic growth seen around the world?
9. Are countries that began modern economic growth more recently doomed to be permanently poorer than the
countries that began modern economic growth in earlier periods? Explain.
10. (Consider This) Why do small differences in the rate of economic growth produce large differences in the
size of the economy over time? Illustrate with an example.
11. In a recent year GDP per capita in the United States was much higher than GDP per capita in France. Why
would there be such a large difference in GDP per capita between two rich leader countries?
12. Give at least three reasons why U.S. workers supply so much more labor than workers in France and other
rich leader countries.
Chapter 08 – Economic Growth
8-6
13. Name at least four institutional structures that promote and sustain modern economic growth. What other
factors also influence a nation’s capacity for economic growth?
14. (Consider This) What are the benefits and costs to Indian citizens of allowing Indian companies to copy and
sell patent-protected drugs developed by U.S. companies?
15. Summarize the four supply factors in economic growth.
16. Explain the demand factor in economic growth.
17. What is the efficiency factor?
18. What is the relevance of productive and allocative efficiency to the growth process?
19. The achievement of full employment is a sufficient condition for the achievement of economic growth.
Evaluate.
Chapter 08 – Economic Growth
8-7
20. Use the diagram below to answer the questions.
(a) If the economy’s production possibilities curve is shown by curve AB, then draw in a new curve CD
which indicates positive economic growth.
(b) What are some of the factors which could cause a shift from AB to a new curve EF?
(c) If the economy illustrated by production possibilities curve AB is producing at point 4, what economic
problem does this represent for this economy?
21. How would the Great Recession of 2007–2009 be pictured in a typical production possibilities curve?
22. Define worker-hours and labor productivity. What factors are behind labor productivity?
Chapter 08 – Economic Growth
8-8
23. Assume that an economy has 2000 workers, each working 3000 hours per year. The average real output
per worker-hour is $10. What will the total output or real GDP be? Explain.
24. Assume that an economy has 5000 workers, each working 2500 hours per year. The average real output
per worker is $20.
(a) What would the total output or real GDP be?
(b) Suppose in year 2 the number of workers increased to 5500. What would real GDP be? What would
the growth rate be?
(c) Suppose in year 3 the average real output per worker declined to $15. What would real GDP be?
What would the growth rate be?
25. Assume that an economy has 9000 workers, each working 2000 hours per year. The average real output
per worker-hour is $20. What will the total output or real GDP be? Explain.
26. Suppose an economy’s real GDP is $125 billion in year 1 and $130 billion in year 2. What is the growth
rate of its GDP?
27. Suppose an economy’s real GDP is $700 billion in year 1 and $718 billion in year 2. What is the growth
rate of its GDP?
28. Which is more important—labor quantity or labor productivity—as a source of economic growth in the
United States? Explain.
29. Give the approximate importance of productivity as a source of economic growth in the United States and
list the various sources which account for this productivity growth and their relative importance.
Chapter 08 – Economic Growth
8-9
30. Discuss the meaning of the statement: “Human history teaches us that economic growth springs from
better recipes, not just more cooking.”
31. How are technological advance and capital formation related?
32. (Consider This) How has the influx of women into the paid labor force over the past half century
influenced economic growth? State at least three of the six reasons given for the increase in the number of
women in the paid workforce over the past half century.
33. How does investment in capital goods and infrastructure contribute to economic growth?
34. What is meant by human capital and how can it be used to promote economic growth?
Chapter 08 – Economic Growth
8-10
35. What is meant by economies of scale and what is the importance of this concept to economic growth?
36. How has improved resource allocation stimulated economic growth?
37. Describe the trend in the rate of productivity from 1973 to 1995 and then from 1995 to 2009.
38. How has the development of the microchip and information technology contributed to increased
productivity?
39. What has been the effect of new firms and increasing profits on productivity?
40. What are the sources of increasing returns and economies of scale of the recent increase in trend rate
productivity experienced in the U.S.?
Chapter 08 – Economic Growth
8-11
41. What are the macroeconomic implications from the recent increase in trend rate productivity?
42. Does the recent increase in trend rate productivity experienced in the U.S. mean that the business cycle is
dead?
43. What are two “safe” or reasonable conclusions that can be drawn on about the acceleration in productivity
growth?
44. Offer a skeptical perspective on the long-term economics of the recent increase in trend rate productivity.
45. Summarize the antigrowth view of economic growth.
46. Offer a defense of economic growth.
Chapter 08 – Economic Growth
8-12
47. Are economic growth and progress synonymous? How might they differ?
48. (Last Word) How has economic growth changed in China over the past 25 years? Are there any lingering
problems economic growth has not solved?