Question 1

Allowing for productivity differences between rich and poor countries results in:
A) poor countries reaching the levels of capital per worker of rich countries.
B) poor countries reaching the levels of output per worker of rich countries.
C) poor countries not reaching the levels of capital per worker of rich countries.
D) rich country capital per worker decreasing to the level of poor countries.

Accepted Answer

Allowing for productivity differences means acknowledging that rich countries often have higher productivity, which allows them to maintain higher levels of capital per worker compared to poor countries. This productivity gap can prevent poor countries from reaching the capital per worker levels of rich countries.

Question 2

When Norway began producing oil, which of the following events did NOT occur?
A) There was an increase in Norway's capital stock.
B) There was an increase in foreign investment in Norway.
C) There was a decline in consumption to finance the investment.
D) There was a current accounts deficit in Norway.

Accepted Answer

There was a decline in consumption to finance the investment is not a correct answer because Norway's oil wealth allowed it to increase consumption and investment simultaneously.

Question 3

Recently, economists have attributed the level of A, in the standard production function q = Ak, to reflect all of the following except:
A) social efficiency.
B) quality of institutions.
C) education policies.
D) technical efficiency.

Accepted Answer

The level of A in the standard production function q = Ak reflects technical efficiency, but not necessarily the other factors listed (social efficiency, quality of institutions, and education policies). However, these factors can indirectly affect A by shaping the broader economic environment in which technical efficiency operates.

Question 4

In the Cobb-Douglas production function, one of the conclusions reached is that the lower the level of income, the higher is the MPK. This is possible because of which of the following?
A) There are increasing returns.
B) The productivity levels are different.
C) There are diminishing returns.
D) There are constant returns.

Accepted Answer

The Cobb-Douglas production function assumes that there are diminishing returns to capital, which means that as more units of capital are added, the additional output produced by each additional unit of capital will decrease. As income levels increase, firms are able to invest in more capital, which means that the MPK (marginal product of capital) will decrease. However, at lower income levels, firms have less capital and may be operating below their optimal level of capital, which means that adding more capital will result in a higher MPK. Therefore, the conclusion that the lower the level of income, the higher is the MPK is due to diminishing returns.

Question 5

If production functions are identical, low-income nations have a ____ capital per worker than high-income nations, _____ labor productivity, and a ____ marginal product of capital.
A) lower; lower; higher
B) lower; higher; higher
C) lower; lower; lower
D) higher; higher; lower

Accepted Answer

Low-income nations typically have lower capital per worker, which results in lower labor productivity. However, because they have less capital to begin with, the marginal product of capital (the additional output resulting from an additional unit of capital) is higher compared to high-income nations that already have a lot of capital.

Question 6

The production function model showed that capital flows to poorer regions, because the marginal product of capital is higher in the poorer regions. Robert Lucas's paper showed that that was NOT true. The reason was that:
A) investors were forced to abandon higher returns in poorer countries.
B) it was assumed that production functions were the same in all countries.
C) it was assumed that production functions were different for rich and poor countries.
D) rich countries offered higher interest rates.

Accepted Answer

Robert Lucas's paper challenged the assumption made in the production function model that production functions were the same in all countries. Instead, Lucas argued that production functions were likely to differ across countries due to differences in technology, institutions, and other factors. Therefore, capital may not flow to poorer regions simply because the marginal product of capital is higher there.

Question 7

If there are diminishing marginal returns to capital, such as postulated in economic production models, what is the marginal product of capital for low-income nations?
A) Their marginal products of capital are lower than in high-income nations.
B) Their marginal products of capital are higher than in high-income nations.
C) Their marginal products of capital are equal to their marginal products of labor.
D) Their marginal products of labor are increasing, causing labor migration.

Accepted Answer

In economic models that assume diminishing marginal returns to capital, low-income nations typically have less capital per worker. Therefore, the marginal product of capital (the additional output from an additional unit of capital) is higher in low-income nations than in high-income nations, where capital is more abundant and each additional unit of capital produces less additional output.

Question 8

What might explain why in some lower-income nations, such as Mexico, there are low levels of capital inflows?
A) the reluctance of the government to allow higher levels of capital inflows
B) the low return on capital
C) the existence of different production functions, which would indicate a lower marginal product of capital
D) identical production functions but other constraints on capital transfers

Accepted Answer

In some lower-income nations, different production functions can lead to a lower marginal product of capital, making these countries less attractive for capital inflows.

Question 9

What implications for the effectiveness of foreign aid would there be if low-income nations have lower marginal products of capital?
A) Foreign aid would probably be more effective.
B) Foreign aid would be preferable to private investment.
C) Foreign aid would suffer the same problems as private investment and possibly be ineffective in increasing productivity.
D) To be effective, foreign aid provided by governments would have to be managed by private concerns.

Accepted Answer

Lower marginal products of capital suggest that the returns on investment are lower in low-income nations. Therefore, foreign aid may suffer the same problems as private investment and possibly be ineffective in increasing productivity. It is important to note that this does not necessarily mean that foreign aid is never effective, but rather that it may not be a solution to all economic problems in low-income nations.

Question 10

Which group of nations has the least correlation between savings and domestic investment?
A) developed countries across the world
B) the European Union
C) emerging economies
D) All nations have the same correlation.

Accepted Answer

The European Union, due to its unique structure and integration, allows for more capital mobility among member states. This means that savings in one country can easily be invested in another, weakening the direct correlation between domestic savings and investment compared to other regions or country groupings.

Question 11

If the production functions of rich and poor nations are NOT identical, resulting in lower marginal products of capital for poor nations, then:
A) capital markets are basically dysfunctional.
B) it must mean the labor productivity for poor nations is higher.
C) capital markets cannot be relied on to bring about convergence.
D) capital markets may be functioning efficiently and correctly after all.

Accepted Answer

Capital markets may still be functioning efficiently even if the marginal products of capital differ between rich and poor nations. This variation can be due to numerous factors such as differences in technology, infrastructure, or institutional quality, rather than a dysfunction of capital markets.

Question 12

With free movement of capital internationally, the principle of convergence postulates that:
A) at some future time, external debt and external wealth will cancel each other out.
B) poor nations will finally adopt capitalism and free markets.
C) when the baby-boom generation retires, the investment rate will rise to compensate.
D) rates of return on capital investment will be equalized worldwide as investors seek the highest return.

Accepted Answer

The principle of convergence postulates that rates of return on capital investment will be equalized worldwide as investors seek the highest return, due to the free movement of capital internationally. This is because investors will move their capital to countries where they can potentially earn a higher return on their investment, leading to the convergence of rates of return.

Question 13

If Mexico has 8% of capital per labor of the U.S. level, it is likely that under the simple model,
A) capital will flow into the United States because it has more capital.
B) Mexico will never achieve the capital-labor ratio of the United States.
C) U.S. capital per labor will decline to the level of Mexico.
D) capital will flow into Mexico because the MPK of capital is higher in Mexico.

Accepted Answer

Under the simple model of capital flow, capital tends to flow from countries with a lower marginal product of capital (MPK) to those with a higher MPK. Since Mexico has only 8% of the capital per labor of the U.S. level, it implies that the MPK in Mexico is likely higher, attracting capital to flow into Mexico for higher returns.

Question 14

Using Norway's oil industry as an example, it is possible to finance large and profitable investment without:
A) risk to investors.
B) government interference.
C) large initial consumption sacrifices.
D) service payments on debt or repayment of principal.

Accepted Answer

Norway was able to build its oil industry without making large initial consumption sacrifices by using the income from the production and sale of oil to fund investments in other industries, such as education and healthcare. This allowed for sustainable economic growth without burdening the population with immediate consumption sacrifices or requiring government interference. However, there is still some risk to investors and service payments on debt or repayment of principal may be necessary depending on the specific investments made.

Question 15

If capital flows freely throughout the world, one would expect it would flow:
A) from the rich nations, where it is abundant and cheap, to the poor nations, where it is scarce and dear.
B) from the poor nations, where it has less value, to the rich nations, where it has more value.
C) from the savers to financial institutions.
D) from international lenders to international borrowers.

Accepted Answer

According to basic economic principles, capital tends to flow from areas where it is abundant and cheap to areas where it is scarce and dear. In this case, the richer nations are likely to have more capital available, and therefore it is expected that capital would flow from these nations to the poorer nations where there are fewer resources available.

Question 16

If two nations have identical production functions, as indicated by free flows of information, what happens when the marginal product of labor (MPL) in one nation is lower than the MPL in the other?
A) The MPK must be lower.
B) The MPK must be higher.
C) The MPL will continue to decline while the other continues to rise.
D) The marginal product of both labor and capital will be equal.

Accepted Answer

If two nations have identical production functions, then their marginal products of labor and capital must be equal when there is free flow of information between them. Therefore, if the MPL in one nation is lower than the MPL in the other, the MPK must be higher to maintain equality in the production functions.

Question 17

The production function may have the same marginal products, yet the production constant term, A, may differ. Today, most economists believe this is caused by:
A) differences in technology.
B) differences in social efficiency of production (factors affecting production, such as policies, work ethic, education, institutional infrastructure, or cultural differences).
C) corruption and a poor regulatory climate.
D) gender bias.

Accepted Answer

The social efficiency of production can influence the production constant term, A, which represents the level of technology and other production factors not accounted for by the inputs. Factors such as policies, work ethic, education, institutional infrastructure, or cultural differences can all affect A, even if the marginal products of inputs remain the same.

Question 18

Which of the following statements about a closed economy is NOT correct?
A) Investment and consumption are to be satisfied with the same output.
B) Investment and consumption are at odds with each other.
C) A closed economy has to be self-sufficient.
D) Consumption smoothing and an increase in investment can be achieved simultaneously.

Accepted Answer

In a closed economy, resources are limited, and increasing investment typically means diverting resources from consumption, making it challenging to achieve consumption smoothing and an increase in investment simultaneously.

Question 19

It is not surprising that financially open economies are able to:
A) enjoy higher levels of consumer spending.
B) recycle investment funds by repaying interest with increased income from production.
C) delink savings and investment, thus increasing consumption smoothing.
D) get lower rates of interest on borrowing.

Accepted Answer

Financially open economies can access international capital markets, allowing them to separate domestic savings from investment, which facilitates consumption smoothing over time.

Question 20

When poor nations cannot compete with rich nations to attract capital because of their lower overall productivity, it creates:
A) convergence.
B) long-run divergence.
C) externalities.
D) opportunities for cross-border investment.

Accepted Answer

The situation described in the question is an example of long-run divergence, where poor nations are unable to catch up with rich nations due to their lower productivity. This can lead to further disparities in income and economic growth between these nations.

Quiz 17: Balance of Payments I: the Gains From Financial Globalization

Allowing for productivity differences between rich and poor countries results in:

When Norway began producing oil, which of the following events did NOT occur?

Recently, economists have attributed the level of A, in the standard production function q = Ak, to reflect all of the following except:

In the Cobb-Douglas production function, one of the conclusions reached is that the lower the level of income, the higher is the MPK. This is possible because of which of the following?

If production functions are identical, low-income nations have a __ capital per worker than high-income nations, _ labor productivity, and a __ marginal product of capital.

The production function model showed that capital flows to poorer regions, because the marginal product of capital is higher in the poorer regions. Robert Lucas's paper showed that that was NOT true. The reason was that:

If there are diminishing marginal returns to capital, such as postulated in economic production models, what is the marginal product of capital for low-income nations?

What might explain why in some lower-income nations, such as Mexico, there are low levels of capital inflows?

What implications for the effectiveness of foreign aid would there be if low-income nations have lower marginal products of capital?

Which group of nations has the least correlation between savings and domestic investment?

If the production functions of rich and poor nations are NOT identical, resulting in lower marginal products of capital for poor nations, then:

With free movement of capital internationally, the principle of convergence postulates that:

If Mexico has 8% of capital per labor of the U.S. level, it is likely that under the simple model,

Using Norway's oil industry as an example, it is possible to finance large and profitable investment without:

If capital flows freely throughout the world, one would expect it would flow:

If two nations have identical production functions, as indicated by free flows of information, what happens when the marginal product of labor (MPL) in one nation is lower than the MPL in the other?

The production function may have the same marginal products, yet the production constant term, A, may differ. Today, most economists believe this is caused by:

Which of the following statements about a closed economy is NOT correct?

It is not surprising that financially open economies are able to:

When poor nations cannot compete with rich nations to attract capital because of their lower overall productivity, it creates: