Deck 8: Economic Growth

Question 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 iS₁00 in year 1 and 102 in year 2. What is the growth rate of real GDP per capita?

Answer 1

The growth rate in real GDP is calculated as follows:
The growth rate in real GDP per capita is calculated as follows. We calculate real GDP first.
Next we are ready to calculate growth in real GDP.

Question 2

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?

Answer 2

Economic growth is measured by with two approaches: 1. an increase in real GDP; 2. an increase in real GDP per capita.
Economic growth is important because growth lessens the burden of scarcity. A growing economy can consume more while increasing its capacity to produce more in the future. Economic growth enables a nation to attain its economic goals more readily.
A difference between 2.5% and 3% growth rate is of great difference over several decades because when compounded over several decades, small absolute differences in rates add up to substantial differences in real GDP and standards of living.

Question 3

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?

Answer 3

According to rule of 70, the number of years needed to double GDP is calculated as follows:
Given number of years to double GDP, we can calculate the annual growth rates as follows:
With 7 years to double GDP :
With 35 years to double GDP :
With 70 years to double GDP :
With 140 years to double GDP :

Question 4

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?

Question 5

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?

Question 6

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.

Question 7

Refer to FigurE₂5.2 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 thE₁0-year period, by what percentage did it fall short of its production capacity?

Question 8

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.

Question 9

Suppose that work hours in New Zombie arE₂00 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?

Question 10

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.

Question 11

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 sellS₁00 units? 1000 units? 1 million units?

Question 12

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.

Question 13

True or false? If false, explain why.
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.

Question 14

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.

Question 15

Relate each of the following to the recent increase in the trend rate of productivity growth:
a. Information technology
b. Increasing returns
c. Network effects
d. Global competition

Question 16

What, if any, are the benefits and costs of economic growth, particularly as measured by real GDP per capita?

Question 17

LAST WORD Based on the information in this chapter, contrast the economic growth rates of the United States and China over the lasT₂5 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?