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Chapter 08 Economic Growth
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
GDP occurring over some time period, or an increase in real GDP per capita occurring
over some time period.
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 Revolution to the
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
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
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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
Answer: The four supply factors are the quantity and quality of natural resources; the
quantity and quality of human resources; the stock of capital goods; and the level of
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 increases in labor
productivity (these components may decrease as well).
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:
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(a) The first part is false because technology has played the most important role in U.S.
economic growth of any growth factor. However, the second part of the statement is
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 can be
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 technology, which
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
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11. LAST WORD Based on the information in this chapter, contrast the economic growth rates
of the United States and China over the last 25 years. How does the real GDP per capita of China
compare with that of the United States? Why is there such a huge disparity of per capita income
between China’s coastal cities and its interior regions?
Answer: Over the past 25 years U.S. real GDP has grown about 3 percent per year;
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
Answer: 4%; 1.96%
Feedback: Consider the following example. 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?
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
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Feedback: Consider the following examples (values). 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?
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.
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? L02
Feedback: Consider the following example. 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?
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4. Refer to Figure 25.2 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: Consider the following example. Refer to Figure 25.2 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?
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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: Consider the following example. 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?
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? L05
Feedback: Consider the following example. 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?
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