Tutorial 4

Production and Growth

I. Terms

1. productivity
2. physical capital
3. human capital
4. natural resources
5. technological knowledge
6. diminishing returns
7. catch-up effect

II. Short-Answer Questions

1. What does the level of a nation’s GDP measure? What does the growth rate of
GDP measure? Would you rather live in a nation with a high level of GDP and
a low growth rate or in a nation with a low level of GDP and a high growth
rate?
2. List and describe four determinants of productivity? Which ones are human
produced?
3. Explain how higher saving leads to a higher standard of living. What might
deter a policymaker from trying to raise the rate of saving?
4. Why does an increase in the rate of saving and investment only increase the
rate of growth temporarily?
5. How does the rate of population growth influence the level of GDP per person?
6. Some economists argue for lengthening patent protection while some
economists argue for shortening it. Why might patents increase productivity?
Why might they decrease productivity?

III. Practice problems

1. Most countries, including the United States, import substantial amounts of

goods and services from other countries. Yet the chapter says that a nation can
enjoy a high standard of living only if it can produce a large quantity of goods
and services itself. Can you reconcile these two facts?
2. Suppose that society decided to reduce consumption and increase investment.
a. How would this change affect economic growth?
b. What groups in society would benefit from this change? What groups
might be hurt?
3. Suppose that an auto company owned entirely by German citizens opens a
new factory in South Carolina.
a. What sort of foreign investment would this represent?
b. What would be the effect of this investment on U.S. GDP? Would the
effect on U.S. GNP be larger or smaller?
4. In the 1990s and the first decade of the 2000s, investors from the Asian
economies of Japan and China made significant direct and portfolio
investments in the United States At the time, many Americans were unhappy
that this investment was occurring.
 a. In what way was it better for the United States to receive this foreign
investment than not to receive it?
b. In what way would it have been better still for Americans to have
made this investment?
5. From 1950 to 2000, manufacturing employment as a percentage of total
employment in the U.S. economy fell from 28 percent to 13 percent. At the
same time, manufacturing output experienced slightly more rapid growth than
the overall economy.
a. What do these facts say about growth in labor productivity (defined as
output per worker) in manufacturing?
b. In your opinion, should policymakers be concerned about the decline
in the share of manufacturing employment? Explain.

IV. Multiple- Choice Questions

1. A reasonable measure of the standard of living in a country is

a. Real GDP per person.
b. Real GDP.
c. Nominal GDP per person.
d. Nominal GDP.
e. The growth rate of nominal GDP per person.

2. Many East Asian countries are growing very quickly because

a. They have enormous natural resources.
b. They are imperialists and have collected wealth from previous victories in war.
c. They save and invest an unusually high percentage of their GDP.
d. They have always been wealthy and will continue to be wealthy, which is
known as the “snowball effect.”

3. When a nation has very little GDP per person,

a. It is doomed to being relatively poor forever.
b. It must be a small nation.
c. It has the potential to grow relatively quickly due to the “catch-up effect.”
d. An increase in capital will likely have little impact on output.
e. None of the above is true.

4. Once a country is wealthy,

a. It is nearly impossible for it to become relatively poorer.
b. It may be harder for it to grow quickly because of the diminishing returns to
capital.
c. Capital becomes more productive due to the “catch-up effect.”
d. It no longer needs any human capital.
e. None of the above is true.

5. The opportunity cost of growth is

a. A reduction in current investment.
b. A reduction in current saving.
c. A reduction in current consumption.
d. A reduction in taxes.
6. For a given level of technology, we should expect an increase in labor productivity
within a nation when there is an increase in each of the following except
a. Human capital per worker.
b. Physical capital per worker.
c. Natural resources per worker.
d. Labor.

7. Which of the following statements is true

a. Countries may have a different level of GDP per person, but they all grow at
the same rate.
b. Countries may have a different growth rate, but they all have the same level of
GDP per person.
c. Countries all have the same growth rate and level of output because any
country can obtain the same factors of production.
d. Countries have great variance in both the level and growth rate of GDP per
person; thus, poor countries can become relatively rich over time.

8. Copper is an example of
a. human capital
b. Physical capital.
c. A renewable natural resource.
d. A nonrenewable natural resource.
e. Technology.

9. Which of the following statements regarding the impact of population growth on

productivity is true?
a. There is no evidence yet that rapid population growth stretches natural
resources to the point that it limits growth in productivity.
b. Rapid population growth may dilute the capital stock, lowering productivity.
c. Rapid population growth may promote technological progress, increasing
productivity.
d. All of the above are true.

10. Thomas Malthus argued that

a. Technological progress will continuously generate improvements in
productivity and living standards.
b. Labor is the only true factor of production.
c. An ever-increasing population is constrained only by the food supply,
resulting in chronic famines.
d. Private charities and government aid will improve the welfare of the poor.
e. None of the above is true.

11. Madelyn goes to college and reads many books while at school. Her education
increases which of the following factors of production?
a. human capital
b. physical capital
c. natural resources
d. technology
e. All of the above would be increased.
12. Which of the following describes an increase in technological knowledge?
a. A farmer discovers that it is better to plant in the spring rather than in the fall.
b. A farmer buys another tractor.
c. A farmer hires another day laborer.
d. A farmer sends his child to agricultural college, and this child returns to work
on the farm.

13. Our standard of living is the most closely related to

a. How hard we work.
b. Out supply of capital because everything of value is produced by machinery.
c. Our supply of natural resources because they limit production.
d. Out productivity because our income is equal to what we produce.

14. Which of the following is an example of foreign portfolio investment?

a. A naturalized U.S. citizen, who was originally born in Germany, buys stock in
Ford, and Ford uses the proceeds to buy a new plant.
b. Toyota builds a new plant in Tennessee.
c. Toyota buys stock in Ford, and Ford uses the proceeds to build a new plant in
Michigan.
d. Ford builds a new plant in Michigan.
e. None of the above is an example of foreign portfolio investment.

15. Which of the following government policies is least likely to increase growth in
Africa?
a. increase expenditures on public education
b. increase restrictions on the importing of Japanese automobiles and electronics
c. eliminate civil war
d. reduce restrictions on foreign capital investment
e. All of the above would increase growth.

16. If Mazda builds a new plant in Illinois,

a. In the future, U.S. GDP will rise more than U.S. GNP.
b. In the future, U.S. GDP will rise less than U.S. GNP.
c. In the future, U.S. GDP and GNP will both fall because some income from
this investment will accrue to foreigners.
d. There has been an increase in foreign portfolio investment in the United States.
e. None of the above is true.

17. If real GDP per person in 2009 is $18,073 and real GDP per person in 2010 is
$18,635, what is the growth rate of real output over this period?
a. 3.0 percent
b. 3.1 percent
c. 5.62 percent
d. 18.0 percent
e. 18.6 percent

18. Which of the following expenditures to enhance productivity is most likely to emit
a positive externality?
a. Megabank buys a new computer.
b. Susan pays her college tuition.
 c. Exxon leases a new oil field.
d. General Motors buy a new drill press.

19. To increase growth, governments should do all of the following except

a. Promote free trade.
b. Encourage saving and investment.
c. Encourage foreigners to invest in your country.
d. Encourage research and development.
e. Nationalize major industries.