Macro Tut 2: Production and Growth

MULTIPLE CHOICE: Identify the choice that best completes the statement or answers the question.

1. As of 2006, using real GDP per person as a measure, we would classify

a. the United States and Mexico as advanced economies and Bangladesh as a middle-income
country.
b. Canada as an advanced economy, Mexico as a middle-income country, and Mali as a
poor country.
c. Japan and India as advanced economies and Mexico as a poor country.
d. Japan as an advanced economy, the United Kingdom as a middle-income country, and
Argentina as a poor country.

2. In some East Asian countries, average income, as measured by real GDP per person, has recently
grown at an average annual rate that implies output will double about every
a. 10 years.
b. 15 years.
c. 20 years.
d. 25 years.

3. Which of the following is correct?

a. Over the last 100 years Japan had a higher average growth rate than the United States.
It follows that, today, the standard of living in Japan is higher than in the United States.
b. The typical person in Bangladesh today has about twice the real income of a
typical American 100 years ago.
c. The typical citizen of China today has about one-half as much real income as the
typical citizen of America today.
d. None of the above is correct.

4. Last year Panglossia had real GDP of 27.0 billion. This year it had real GDP of 31.5 billion. Which
of the following changes in population is consistent with a 5 percent growth rate of real GDP per
person over the last year?
a. The population decreased from 88 million to 84 million.
b. The population decreased from 75 million to 73 million.
c. The population increased from 45 million to 50 million.
d. The population increased from 60 million to 62 million.

5. Productivity is defined as
a. the amount of difficulty that is involved in producing a given quantity of goods and
services.
b. the quantity of labor that is required to produce one unit of goods and services.
c. the quantity of goods and services produced from each unit of labor input.
d. the quantity of goods and services produced over a given amount of time.

6. Cedar Valley Furniture uses 5 workers, each working 8 hours, to produce 80 rocking chairs. What
is the productivity of these workers?
a. 2 chairs per hour
b. 10 chairs per hour
c. 1 hour per chair
d. 80 chairs

7. In a market economy, we know that a resource has become scarcer when

a. its price rises relative to other prices.
b. it is non-renewable and some of it is used.
c. people search for substitutes.
d. All of the above are correct.

8. Which of the following best states economists' understanding of the facts concerning the
relationship between natural resources and economic growth?
a. A country with no or few domestic natural resources is destined to be poor.
b. Differences in natural resources have virtually no role in explaining differences in
standards of living.
c. Some countries can be rich mostly because of their natural resources and countries without
natural resources need not be poor, but can never have very high standards of living.
d. Abundant domestic natural resources may help make a country rich, but
even countries with few natural resources can have high standards of living.

9. Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the
population of both countries was unchanged.
a. It follows that real GDP per person must be higher in Oceania than in Freedonia.
b. It follows that real GDP per person grew faster in Oceania than in Freedonia.
c. It follows that the standard of living must be higher in Oceania than in Freedonia.
d. All of the above are correct.

10. Which of the following would, by itself, reveal the most about a country’s standard of living?
a. its level of capital
b. the number of hours worked
c. its availability of natural resources
d. its productivity

11. Suppose a country imposes new restrictions on how many hours people can work. If these
restrictions reduce the total number of hours worked in the economy, but all other factors that
determine output are held fixed, then
a. productivity and output both rise.
b. productivity rises and output falls.
c. productivity falls and output rises.
d. productivity and output fall.

12. If a country's saving rate increases, then in the long run

a. both productivity growth and income growth increase.
b. only productivity growth increases.
c. only income growth increases.
d. neither productivity growth nor income growth increase.

13. The traditional view that the production process has diminishing returns implies that
a. the increase in output growth from an increase in the saving rate rises over time, and that, other things the
same, rich countries should grow faster than poor ones.
b. the increase in output growth from an increase in the saving rate falls over time, and that, other things the
same, rich countries should grow faster than poor ones.
c. the increase in output growth from an increase in the saving rate rises over time, and that, other things the
same, poor countries should grow faster than rich ones.
d. the increase in output growth from an increase in the saving rate falls over time, and that, other things
the same, poor countries should grow faster than rich ones.

14. Suppose U.S.-based Intel Corporation builds and operates a new computer chip factory in
Honduras. Future production from such an investment would
a. increase Honduran GDP more than it would increase Honduran GNP.
b. increase Honduran GNP more than it would increase Honduran GDP.
c. not affect Honduran GNP, but would increase Honduran GDP.
d. have no affect on either Honduran GDP or GNP.

15. Which of the following statements is correct?

a. In an economy-wide sense , property rights are an important prerequisite(tiên quyết) for the
price system to work. (Xét trên toàn bộ nền kinh tế, quyền tài sản là điều kiện tiên quyết
quan trọng để hệ thống giá cả vận hành.)
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.

16. Inward-oriented policies

a. are generally supported by economists.
b. are primarily concerned with the development of human capital.
c. in some ways are like prohibiting the use of certain technologies
d. All of the above are correct.

17. Outward-oriented policies

a. allow countries to take advantage of gains from trade.
b. have generally led to high growth for the countries that pursued them.
c. receive widespread support from economists.
d. All of the above are correct.

18. Which of the following countries achieved higher economic growth, in part by mandating a
reduction in population growth?
a. Great Britain
b. China
c. Australia
d. France

19. Some poor countries appear to be falling behind rather than catching up with rich countries.
Which of the following could explain the failure of a poor country to catch up?
a. The poor country has outward-oriented trade policies.
b. The poor country allows foreign direct investment.
c. The poor country has poorly developed property rights.
d. All of the above are correct.

ANS:
1B 2A 3D 4C 5C 6A 7A 8D 9B 10D 11B 12D 13D 14A 15D 16C 17D 18B 19C

EXERCISES AND PROBLEMS:

Exercise 1: Fill the blank with NO MORE THAN 4 WORDS:

1. Economists define …………………. as human-made resources such as buildings and machines.
Physical capital makes workers more productive.
2. ……………. refers to the improvement in labor created by the education and knowledge embodied in
the workforce.
3. Workers today are able to produce more than those in the past, even with ………….. amount of
physical and human capital, because technology has advanced over time.
4. In analyzing historical economic growth, economists have discovered a crucial fact about the
estimated aggregate production function: it exhibits ……………. to physical capital.
5. It’s important to realize that diminishing returns to physical capital is an “other things equal”
phenomenon: additional amounts of physical capital are ….. productive when the amount of human
capital and the technology are held fixed.
6. An economy’s physical capital is created mainly through investment spending by individuals and
private companies. Much of an economy’s human capital, in contrast, is the result of government
spending on …...
7. Research and development is spending to …. new technologies.
8. Although some infrastructure is provided by …………...., much of it is either provided by the
government or requires a great deal of government regulation and support.
9. A country’s investment spending can be either more or less than its domestic savings because of
………………………..
10. The …………………………shows how real GDP per worker depends on three factors: physical,
human, natural per worker

Exercise 2: Find the underlined parts that are incorrect in these statements and correct them:

11. Levels of real GDP per capita vary greatly around the world: more than half the world’s
A B C

population lives in countries that are still richer than the United States was in 1900.
D
12. The world economy contains examples of success and failure in the effort to achieve A
A

long-run economic growth. East Asian economies have done many things right and achieved
B C
low growth rates.
C
13. These are firm’s policies and institutions that increase savings and investment spending,
A B

foreign investment, infrastructure, research and development.

C D
14. The key to long-run growth is rising labor productivity, which is capital per worker.

A B C D

ANS:
1. physical capital
2. Human capital
3. The same
4. Dimishing returns
5. Less
6. Education
7. Create & implement
8. Private companies
9. Foreign investment
10. Aggregate production function
11. D -> poorer
12. D -> higher
13. A -> government policies
14. D -> output

Problem 1
Suppose that in 1998, an economy has 1,000 workers, each has 1,900 working-hours per year. The
value of goods and services produced by one worker in an hour is $3.
Calculate real GDP of this economy in 1998
If in 1999 real GDP increase to $19 million while the number of workers and their working-hours per
year stay the same, what is the growth rate of the workers’ productivity? Without calculation can you
guess the economic growth rate in 1999?
What are determinants of productivity? What can policy-makers do to increase human capital per
worker?
Problem 1
1) Real GDP in 1998 = $3 x 1,000 workers x 1,900 working-hours = $5,700,000
2) Productivity of the workers in 1999 = $19 million/(1,000 workers x 1,900 working hours) = $10
Growth rate of the workers’ productivity = ($10 - $3)/$3 x 100 = 233.3 %
Economic growth rate in this case is 233.3% because other things stay the same except for the
productivity of the workers increasing by 233.3%
3) Four determinants of productivity: Physical capital, Human Capital, Natural Resources and
Technological knowledge
To increase human capital, policy-makers should: i)improve education by providing good schools and
encourage people to take advantage of them ii) improve health of the population from better nutrition

Problem 2
Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for
the United States and South Korea from 1960-1991. However, during these same years South Korea
had a 6 percent growth rate of average annual income per person, while the United States had only a 2
percent growth rate. If the saving rates were the same, why were the growth rates so different?
Problem 2
The explanation is based on the concept of diminishing returns to capital. A country that has a lot of
income, and so a lot of capital, gains less by adding more capital than does a country that currently has
little capital. It is easy to envision how a poor country without much capital could increase its output
considerably with even a little more capital.