Chapter 28- Economic Growth
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Chapter 28 – Economic Growth
McConnell, Brue, and Flynn 21e
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
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
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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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
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
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
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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.
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
9. Relate each of the following to the 1995 to 2010 increase in the trend rate of productivity
growth: LO5
a. Information technology
b. Increasing returns
c. Network effects
d. Global competition
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10. What, if any, are the benefits and costs of economic growth, particularly as measured by real
GDP per capita? LO6
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?
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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.
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.
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
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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.
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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.
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.
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7. True or False: Computers and increased global competition have retarded economic growth in
recent decades. LO5
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.
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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Feedback:
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
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
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4. Refer to Figure 28.2 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
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
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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