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Chapter 08 - Economic Growth
Chapter 08 - Economic Growth
McConnell, Brue, and Flynn 20e
DISCUSSION QUESTIONS
1. How is economic growth measured? Why is economic growth important? Why could the
difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over
several decades? LO1
Answer: Economists define and measure economic growth as either an increase in real
With either definition, economic growth is calculated as a percentage rate of growth per
Economic growth means a higher standard of living, provided population does not
If population is growing at 2.5 percent a year—and it is in some of the poorest
2. When and where did modern economic growth first happen? What are the major institutional
factors that form the foundation for modern economic growth? What do they have in common?
LO2
Answer: Economic historians informally date the start of the Industrial
3. Why are some countries today much poorer than other countries? Are today’s poor countries
destined to always be poorer than today’s rich countries? If so, explain why. If not, explain how
today’s poor countries can catch or even pass today’s rich countries. LO2
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Chapter 08 - Economic Growth
Answer: The reason we see such stark differences in income per capita is because
of modern economic growth. The countries that began the modern economic
growth process sooner, the ‘leader’ countries, have moved away from the
4. What are the four supply factors of economic growth? What is the demand factor? What is the
efficiency factor? Illustrate these factors in terms of the production possibilities curve. LO3
Answer: The four supply factors are the quantity and quality of natural resources;
5. Suppose that Alpha and Omega have identically sized working-age populations but that total
annual hours of work are much greater in Alpha than in Omega. Provide two possible reasons for
the difference. LO3
Answer: One explanation might be that Omega’s labor force is underemployed,
6. What is growth accounting? To what extent have increases in U.S. real GDP resulted from
more labor inputs? From greater labor productivity? Rearrange the following contributors to the
growth of productivity in order of their quantitative importance: economies of scale, quantity of
capital, improved resource allocation, education and training, technological advance. LO4
Answer: Growth accounting is a procedure that decomposes the supply-side
elements into its different components. Primarily increases in work hours and
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Chapter 08 - Economic Growth
Technological advance—the discovery of new knowledge that results in the
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Chapter 08 - Economic Growth
7. True or False: If false, explain why. LO4
a. Technological advance, which to date has played a relatively small role in U.S. economic
growth, is destined to play a more important role in the future.
b. Many public capital goods are complementary to private capital goods.
c. Immigration has slowed economic growth in the United States.
Answer:
a. The first part is false because technology has played the most important role
8. Explain why there is such a close relationship between changes in a nation’s rate of
productivity growth and changes in its average real hourly wage. LO5
Answer: The average real hourly wage represents the average purchasing power
that each worker receives. Purchasing power refers to the amount of output that
9. Relate each of the following to the recent increase in the trend rate of productivity growth:
LO5
a. Information technology
b. Increasing returns
c. Network effects
d. Global competition
Answer: The rate of productivity growth has grown substantially due to
innovations using microchips, computers, new telecommunications devices and
the Internet. All of these innovations describe features of what we call information
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Chapter 08 - Economic Growth
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Chapter 08 - Economic Growth
10. What, if any, are the benefits and costs of economic growth, particularly as measured by real
GDP per capita? LO6
Answer: Critics of growth say industrialization and growth result in pollution, global
warming, ozone depletion, and other environmental problems. These adverse negative
Critics of growth also argue that there is little compelling evidence that economic growth
has solved sociological problems such as poverty, homelessness, and discrimination.
11. LAST WORD Would you expect a country with a total fertility rate of 2.7 to have a growing
or a shrinking population over the long run? What about a country with a total fertility rate of
1.2? In 20 years, will America have more or fewer workers per retiree than it does today? Why
does a falling inverse dependency ratio make it harder for real GDP to continue growing?
Answer: To keep the population stable in modern societies, the total fertility rate
must be about 2.1 births per woman per lifetime (= 1 child to replace mom, 1
There will be more retirees as compared to working-age adults in America
because the Baby Boom generation is now retiring.
The consequence of the falling inverse dependency rate is that worker
REVIEW QUESTIONS
1. If real GDP grows at 7 percent per year, then real GDP will double in approximately
_________ years. LO1
a. 70.
b. 14.
c. 10.
d. 7.
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Chapter 08 - Economic Growth
If real GDP grows at 7 percent per year, then real GDP will double in approximately 10
years.
We can derive this fact by using the rule of 70, which tells us that the approximate
2. In 1820 living standards in various places around the globe were _________ they are today.
LO2
a. More widely varying than.
b. Just as widely varying as.
c. Less widely varying than.
Answer: c. less widely varying than.
In 1820 living standards in various places around the globe were less widely varying than
That was true for two reasons. First, before the advent of the Industrial Revolution and
As a result, there had not yet been much time for the countries enjoying modern
3. True or False: Countries that currently have low real GDPs per capita are destined to always
have lower living standards than countries that currently have high real GDPs per capita. LO2
Answer: false.
This statement is false because quite a few countries have gone from being poor to being
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Chapter 08 - Economic Growth
4. Identify each of the following situations as something that either promotes growth or retards
growth. LO2
a. Increasing corruption allows government officials to steal people’s homes.
b. A nation introduces patent laws for the first time.
c. A court order shuts down all banks permanently.
d. A poor country extends free public schooling from 8 years to 12 years.
e. A nation adopts a free-trade policy.
f. A formerly communist country adopts free markets.
Answers:
a. retards growth
b. promotes growth
Certain institutional structures promote economic growth. They include strong property
Let’s apply that list to each of the situations given in this question. To begin with,
When a nation introduces patents laws for the first time, it promotes growth by making
A court order that shuts down all banks permanently will retard growth by making it
That is because banks are institutions that help to channel savings from households to
firms.
Without banks, many firms will be starved for funds and unable to invest as quickly as
The extension of free public schooling for an additional four years will help to promote
Adopting a free-trade policy also promotes growth by allowing new technologies to flow
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Chapter 08 - Economic Growth
5. Real GDP equals _________ times _________. LO4
a. Average hours of work; quantity of capital.
b. Average hours of work; allocative efficiency.
c. Labor input; labor productivity.
d. Natural resources; improvements in technology.
Answer: c, labor input; labor productivity.
The correct answer is that real GDP equals labor input times labor productivity.
Looking at the formula, we see that the economy’s output of goods and services is
Increasing the amount of labor input is difficult, as it involves things like trying to
convince retirees to come out of retirement or attempting to convince existing workers to
6. Suppose that just by doubling the amount of output that it produces each year, a firm’s per-unit
production costs fall by 30 percent. This is an example of: LO4
a. Economies of scale.
b. Improved resource allocation.
c. Technological advance.
d. The demand factor.
Answer: a. economies of scale.
Economies of scale occur if shifting to a higher-volume production method lowers a
firm’s per-unit production costs.
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Chapter 08 - Economic Growth
7. True or False: Computers and increased global competition have retarded economic growth in
recent decades. LO5
This statement is false because computers and increased global competition have raised
(rather than lowered) the rate of economic growth in recent decades.
8. Identify following arguments about economic growth as being either anti-growth or pro-
growth. LO6
a. Growth means worker burnout and frantic schedules.
b. Rising incomes allow people to buy more education, medical care, and recreation.
c. The Earth has only finite amounts of natural resources.
d. We still have poverty, homelessness, and discrimination even in the richest countries.
e. Richer countries spend more money protecting the environment.
f. Natural resource prices have fallen rather than increased over time.
Answers:
a. anti-growth
b. pro-growth
PROBLEMS
1. Suppose an economy’s real GDP is $30,000 in year 1 and $31,200 in year 2. What is the
growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2. What is
the growth rate of real GDP per capita? LO1
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Chapter 08 - Economic Growth
Feedback:
x 100).
To determine the growth rate of real GDP per capita we first need to find real GDP per
capita for each (= real GDP/population).
2. What annual growth rate is needed for a country to double its output in 7 years? In 35 years? In
70 years? In 140 years? LO1
Answers: 10; 2; 1, 0.5.
Feedback: The “Rule of 70,” which is to divide 70 by the rate of growth, gives us the
time it takes for a country to double its output.
Years to double = (70 / Rate of Growth)
Rearranging this equation
Rate of Growth = (70 / Years to double)
3. Assume that a “leader country” has real GDP per capita of $40,000, whereas a “follower
country” has real GDP per capita of $20,000. Next suppose that the growth of real GDP per capita
falls to zero percent in the leader country and rises to 7 percent in the follower country. If these
rates continue for long periods of time, how many years will it take for the follower country to
catch up to the living standard of the leader country? LO2
Feedback: The “Rule of 70,” which is to divide 70 by the rate of growth, gives us the
time it takes for a country to double its output.
Since the rate of growth for real GDP per capita is 7% in the follower country, the
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Chapter 08 - Economic Growth
4. Refer to Figure 8.2 and assume that the values for points a, b, and c are $10 billion, $20 billion,
and $18 billion respectively. If the economy moves from point a to point b over a 10-year period,
what must have been its annual rate of economic growth? If, instead, the economy was at point c
at the end of the 10-year period, by what percentage did it fall short of its production capacity?
LO3
Feedback:
The “Rule of 70,” which is to divide 70 by the rate of growth, gives us the time it takes
for a country to double its output.
Rearranging this equation
Rate of Growth = (70 / Years to double)
5. Suppose that work hours in New Zombie are 200 in year 1 and productivity is $8 per hour
worked. What is New Zombie’s real GDP? If work hours increase to 210 in year 2 and
productivity rises to $10 per hour, what is New Zombie’s rate of economic growth? LO4
Feedback:
New Zombie’s real GDP in a given year equals hours worked multiplied by productivity.
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Chapter 08 - Economic Growth
6. The per-unit cost of an item is its average total cost (= total cost/quantity). Suppose that a new
cell phone application costs $100,000 to develop and only $.50 per unit to deliver to each cell
phone customer. What will be the per-unit cost of the application if it sells 100 units? 1000 units?
1 million units? LO5
Feedback:
Total Cost = $100,000 + 100 x $0.50 = $100,050
Total Cost = $100,000 + 1000 x $0.50 = $100,500
Total Cost = $100,000 + 1,000,000 x $0.50 = $600,000
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