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Chapter 24

Production and Growth

MULTIPLE CHOICE (1-21)

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2 Chapter 24/Production and Growth

1
. A nation’s standard of living is measured by its
a. nominal GDP.
b. nominal GDP per person.
c. real GDP.
d. real GDP per person.
2
. The income per person in rich countries like Japan, the United States, and West Germany is
about how many times that in developing countries such as India and Indonesia?
a. no more than 2
b. 4
c. 6
d. 10 or more
3
. Over the past century in the United States, real GDP per person has grown by about
a. 2 percent per year.
b. 4 percent per year.
c. 6 percent per year.
d. 10 percent per year.
e. None of the above are correct.
4
. Over the past century in the United States, average income as measured by real GDP per
person has grown at an average annual rate that implies should double about every
a. 20 years.
b. 25 years.
c. 35 years.
d. 45 years.
5
. Over the past century in the United States, average income as measured by real GDP per
person has grown about
a. 1 percent per year, which implies a doubling about every 65 years.
b. 2 percent per year, which implies a doubling about every 35 years.
c. 4 percent per year, which implies a doubling about every 20 years.
d. None of the above are correct.
6
. In the United States, as measured by real GDP, average income is about how many times
as high as average income a century ago?
a. 4
b. 8
c. 12
d. 16
ANSWER: b. 8
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

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7
. In recent decades, average income in some East Asian countries, such as Hong Kong,
Singapore, and Taiwan, has risen about
a. 1 percent per year.
b. 2 percent per year.
c. 4 percent per year.
d. 7 percent per year.
8
. In some East Asian countries, average income, as measured by real GDP per person, has
grown at an average annual rate that implies output should double about every
a. 10 years.
b. 15 years.
c. 25 years.
d. 35 years.
9
. In the length of one generation, which of the following countries has gone from being
among the poorest countries in the world to being among the richest?
a. Chad
b. Ethiopia
c. South Korea
d. All of the above are correct.
10
. Average income has been stagnant for many years in
a. Ethiopia.
b. Ireland.
c. Singapore.
d. All of the above are correct.
11
. Which of the following is not true?
a. Growth rates of real GDP per person vary substantially from country to country.
b. GDP measures total expenditures and total income.
c. Richer countries have more televisions, better nutrition, better health care, and longer
life expectancy.
d. Productivity is not closely linked to government policies.
12
.
Which of the following is measured by real GDP?
a. total real output
b. productivity
c. macroeconomic prices
d. All of the above are correct.
ANSWER: a. total real output
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

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13
. The amount of goods and services produced from each hour of a worker's time is called
a. per capita GDP.
b. per capita GNP.
c. the standard of production.
d. productivity.
14
. A nation's standard of living is determined by
a. productivity.
b. gross domestic product.
c. national income.
d. how much it has relative to others.
15
. Which of the following is correct?
a. Both levels and growth rates of real GDP per person are diverse across countries.
b. People in countries where real GDP growth was higher over the last 100 years have
higher standards of living than people in all countries where real GDP growth was
smaller.
c. The typical citizen of China has about as much real income as the typical American in
1950.
d. All of the above are correct.
16
. In 1997, the typical Pakistani had about how many times the income of the typical
American in 1870?
a. 1/3
b. 1/2
c. 2
d. 3
17
. In 1997, the typical citizen of China had about as much real income as the typical American
in
a. 1870.
b. 1920.
c. 1945.
d. 1970.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
18
. Of the following countries, which had the highest growth rate over the last 100 years?
a. Brazil
b. Germany
c. United Kingdom
d. United States
ANSWER: a. Brazil
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

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19
. Countries that grew the fastest over the last 100 years had growth rates of about
a. 0.3 percent.
b. 1.0 percent.
c. 3.0 percent.
d. 5.0 percent.
20
. Which of the following is correct?
a. Countries with the highest growth rates are the ones that had the highest level of real
GDP 100 years ago.
b. The ranking of countries by income changes substantially over time.
c. Most countries have had little fluctuation around their average growth rates.
d. Over the last 100 years, Japan had the highest real GDP growth rate, and now has the
highest real GDP per person.
21
. Over the last 100 years which of the following had growth rates higher than that of the
United States?
a. Brazil
b. Japan
c. China
d. All of the above are correct.
22
. Which of the following nations experienced average rates of economic growth of less than
1.0 percent over the last 100 years?
a. Bangladesh
b. China
c. United States
d. India
23
. In 1870, the richest country in the world was

19

~ANSWER:
c. 3.0 percent.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

20

~ANSWER:
b. The ranking of countries by income changes substantially over time.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

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a. Germany.
b. the United Kingdom.
c. the United States.
d. Russia.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
24
. In 2000, Erehwon had a population of 4,000 and real GDP of about 12,000,000. In 1999 it
had a population of 3,500 and real GDP of about 9,625,000. What was the growth rate of
real GDP per person in Erehwon between 1999 and 2000?
a. about 25 percent
b. about 14 percent
c. about 9 percent
d. None of the above are correct.
ANSWER: c. about 9 percent
25
. Compounding refers to
a. the adjustment made to GDP meant to take out the effects of inflation.
b. the geometric smoothing of productivity data.
c. the accumulation of a growth rate over a period of time.
d. the increase in a growth rate over a period of time.

26
. Using the "rule of 70," calculate how many years it would take for John's income to double
if he were to experience a 4 percent increase in income per year.
a. 35 years
b. 28 years
c. 22 years
d. 17.5 years

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27
. If James expects to have a 10 percent salary increase each year, how long will it take for his
salary to double according to the “rule of 70”?
a. 5 years
b. 7 years
c. 14 years
d. 20 years

28
. According to the “rule of 70,” if a country has a growth rate of about .70 percent per year it
will take about
a. 100 years for their output to double, but only take about 49 years to double if their
growth rate was 3 percent.
b. 100 years for their output to double, but only take about 23 years to double if their
growth rate was 3 percent.
c. 49 years for their output to double, but only take about 23 years to double if their
growth rate was 3 percent.
d. 49 years for their output to double, but only take about 10 years to double if their
growth rate was 3 percent.

27

~ANSWER:
b. 7 years
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

28

~ANSWER:
b. 100 years for their output to double, but only take about 23 years to double if their growth rate was 3
percent.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

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29
. According to the “rule of 70,” about how many more years does it take the output of a
country to double if its output grows at 2 percent per year instead of 3 percent per year?
a. 23 years
b. 21 years
c. 12 years
d. 7 years
30
. Ben Franklin died and left $5,000 to be invested for a period of 200 years to benefit medical
students and scientific research. According to the “rule of 70,” how often would this money
have doubled if it grew 10 percent per year every year?
a. every 10 years
b. every 7 years
c. every 5 years
d. every 3.5 years
31
. According to the rule of 70, if some variable grows at a rate of x percent per year, then that
variable doubles in approximately
a. 70x years.
b. 70/x years.
c. x/70 years.
d. 70(1 – x) years.
32
. Productivity
a. is the same across countries and so provides no help explaining differences across
countries in the standard of living.
b. explains very little of the differences across countries in the standard of living.
c. explains some, but not most of the differences across countries in the standard of
living.
d. explains most of the differences across countries in the standard of living.
33
. Which of the following is a correct way to measure productivity?
a. compute output growth
b. divide the change in output by the change in number of hours worked
c. divide the number of hours worked by output
d. divide output by the number of hours worked
34
. Robin lives on a deserted island. If she spends 8 hours fishing, she catches 24 fish. Her
productivity of fishing is
a. 192 fish.
b. 1/3 hour per fish.
c. 3 fish per hour.
d. The answer cannot be computed using the information provided.

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35
. Which of the following is not correct?
a. A country’s standard of living and its productivity are closely related.
b. Productivity refers to output produced per hour of work.
c. Increases in productivity can be used to increase output or leisure.
d. Countries that have had higher output growth per person have typically not experienced
higher productivity growth.
36
. Both Tom and Jerry work eight hours a day. Tom can produce six baskets of goods per hour
while Jerry can produce just four baskets of the same goods per hour. It follows that Tom’s
a. productivity is greater than Jerry’s.
b. output is greater than Jerry’s.
c. standard of living is higher than Jerry’s.
d. All of the above are correct.
37
. Which of the following is a determinant of productivity?
a. human capital
b. physical capital
c. natural resources
d. All of the above are correct.
38
. The inputs used to produce goods and services are called
a. the production function.
b. the consumption function.
c. the factors of production.
d. None of the above are correct.
39
. The equipment and structures that are available to produce goods and services are called
a. the production function.
b. technology.

36

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

37

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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c. physical capital.
d. human capital.
40
. The saws, lathes, and drill presses that woodworkers use to produce goods and services are
a. physical capital.
b. human capital.
c. natural resources.
d. technological knowledge.
41
. Which of the following would not be considered physical capital?
a. a new factory
b. a new computer used in a restaurant
c. a desk used in an accountant's office
d. on-the-job training
42
. Which of the following would be considered physical capital?
a. the copy machines in a copy shop
b. the produce used to make salads at a restaurant
c. the skills and knowledge of a stock broker
d. All of the above are correct.
43
. Human capital is
a. the stock of equipment and structures that is used to produce goods and services.
b. the knowledge and skills that workers acquire through education, training, and
experience.
c. land, rivers, and mineral deposits.
d. technological knowledge.

44
. Which of the following is considered human capital?
a. knowledge acquired from early childhood programs
b. knowledge acquired from grade school
c. knowledge acquired from on-the-job training
d. All of the above are correct.
45
. Human capital is a produced factor of production. Producing human capital requires inputs
in the form of
a. teachers.

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b. libraries.
c. on-the-job-training.
d. All of the above are correct.
46
. Which of the following is human capital?
a. breakfasts served in a company’s cafeteria
b. the exercise equipment in a company’s gym
c. understanding how to use a company’s accounting software
d. All of the above are correct.
47
. Which of the following is considered human capital?
a. the education you are pursuing
b. your comfortable office chair
c. the wrist rest for your computer
d. All of the above are correct.
48
. Which of the following is a part of your Economics professor’s human capital?
a. her copy of Mankiw’s text
b. her chalk holder
c. the degree she earned from some prestigious university
d. All of the above are correct.
49
. Natural resources
a. are inputs provided by nature.
b. are inputs such as land, rivers, and mineral deposits.
c. take two forms: renewable and nonrenewable.
d. All of the above are correct.
50
. Which of the following is an example of a nonrenewable resource?

46

~ANSWER:
c. understanding how to use a company’s accounting software
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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a. oil
b. lumber
c. livestock
d. All of the above are correct.
51
. Natural resources are
a. produced factors of production.
b. included as part of physical capital.
c. the nonrenewable resources that are gone once used.
d. the renewable and nonrenewable inputs of production provided by nature.
52
. In a market economy, scarcity of resources is reflected in
a. supply.
b. demand.
c. the stock of the resource.
d. market prices.
53
. In a market economy, the real, or inflation adjusted, price of a resource measures its
a. contribution to revenue.
b. relative scarcity.
c. relative importance.
d. contribution to efficiency.
54
. The market prices of most natural resources (adjusted for inflation) have been
a. rising.
b. stable or rising.
c. stable or falling.
d. falling.

51

~ANSWER:
d. the renewable and non-renewable inputs of production provided by nature.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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55
. Market prices show that natural resources
a. are a limit to economic growth.
b. are unrelated to economic growth.
c. are not a limit to economic growth.
d. are limiting productivity because of increased scarcity.
56
. Which of the following is correct?
a. There are no renewable natural resources.
b. Technology requires greater use of natural resources.
c. Human capital is equivalent to technology.
d. The relative prices of most natural resources are stable or falling.
57
. Technological knowledge refers to
a. the knowledge and skills that workers acquire through education, training, and
experience.
b. the stock of equipment and structures that are used to produce goods and services.
c. the understanding of the best ways to produce goods and services.
d. All of the above are correct.
58
. Proprietary technology is knowledge that is
a. obsolete.
b. known by everyone.
c. known by all in the profession.
d. known only by the company that discovers it.
59
. Your instructor discovers a way to teach you economics more efficiently. He publishes his
findings in a journal. His findings
a. are not included in technological knowledge.
b. become common knowledge.

55

~ANSWER:
c. are not a limit to economic growth.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

56

~ANSWER:
d. The relative prices of most natural resources are stable or falling.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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c. become proprietary knowledge.


d. None of the above are correct.
60
. Your company discovers a better way to produce mousetraps, but your better methods are
not apparent from the mousetraps themselves. Your knowledge of how to more efficiently
produce mousetraps is
a. proprietary technological knowledge.
b. proprietary, but not technological knowledge.
c. common technological knowledge.
d. common, but not technological knowledge.
61
. Technological knowledge refers to
a. the amount of time the population has devoted to reading society's textbooks.
b. available information on how to produce things.
c. resources expended transmitting society's understanding to the labor force.
d. All of the above are technological knowledge.
62
. Although technological knowledge and human capital are closely related, there is an
important difference. A relevant metaphor would be
a. technological knowledge is the quality of society's textbooks, whereas human capital is
the amount of time that the population has devoted to reading them.
b. technological knowledge is the textbook, whereas human capital is the ink.
c. technological knowledge is the thought process, whereas human capital is the calorie
burn.
d. None of the above are relevant.
63
. The relationship between the quantity of output created and the quantity of inputs needed to
create it is called
a. the capital accumulation function.
b. the production function.
c. technological knowledge.
d. human capital.
64
. If your firm has constant returns to scale, then if you doubled all your inputs your firm’s
output would
a. not change.
b. increase, but by less than double.

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c. double.
d. more than double.
65
. You bake cookies. One day you double the time you spend, double the number of chocolate
chips, flour, eggs, and all your other inputs, and bake twice as many cookies. Your cookie
production function
a. has decreasing returns to scale.
b. has zero returns to scale.
c. has constant returns to scale.
d. has increasing returns to scale.
66
. If there are constant returns to scale, the production function can be written as
a. xY = 2xAF(L, K, H, N).
b. Y/L = A F(xL, xK, xH, xN).
c. Y/L = A F( 1, K/L, H/L, N/L).
d. L = AF(Y, K, H, N).
67
. Using the production function and notation employed by Mankiw, K/L measures
a. output per worker.
b. natural resources per worker.
c. technological knowledge per worker.
d. physical capital per worker.
68
. The constant returns production function given in the text is xY = A F(xL, xK, xH, xN). If
we let x = 1/L, then the equation becomes Y/L = A F(1, K/L, H/L, N/L) where Y is the
quantity of output, A is the level of available production technology, L is the quantity of
labor, H is the quantity of human capital, and N is the quantity of natural resources. The
equation Y/L = A F(1, K/L, H/L, N/L) provides a
a. measure of gross domestic product.
b. summary for the four determinants of productivity.
c. foundation for measuring inflation.
d. measure of the availability of natural resources.
69
. Which of the following would increase productivity?
a. an increase in the physical capital stock per worker

65

~ANSWER:
c. has constant returns to scale.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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b. an increase in human capital per worker


c. an increase in natural resources per worker
d. All of the above are correct.
70
. One of the Ten Principles of Economics in Chapter 1 is that people face tradeoffs. The
growth that arises from capital accumulation is not a free lunch: It requires that society
a. conserve resources for future generations.
b. recycle resources so that future generations can produce goods and services with the
accumulated capital.
c. sacrifice consumption goods and services now in order to enjoy more consumption in
the future.
d. None of the above are correct.
71
. Capital accumulation
a. requires that society sacrifice consumption goods in the present.
b. allows society to consume more in the present.
c. decreases saving rates.
d. has no tradeoffs.
72
. One way that government can encourage growth and, in the long run, raise the economy's
standard of living is by encouraging
a. population growth.
b. saving and investment.
c. consumption.
d. spending.
73
. Across countries, investment and growth rates are
a. unrelated.
b. positively related.
c. negatively related.
d. positively related for rich countries, but negatively related for poor countries.

70

~ANSWER:
c. sacrifice consumption goods and services now in order to enjoy more consumption in the future.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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74
. The traditional view of the production process is that capital is subject to
a. increasing returns.
b. diminishing returns.
c. constant returns.
d. diminishing returns for low levels of capital, and increasing returns for high levels of
capital.
75
. If there are diminishing returns to capital,
a. increases in the capital stock eventually decrease output.
b. increases in the capital stock increase output by ever smaller amounts.
c. capital produces fewer goods as it ages.
d. new ideas are not as useful as old ideas.
76
. In the long run, a higher saving rate
a. cannot increase the capital stock.
b. increases productivity.
c. means that people must consume less in the future.
d. None of the above are correct.
77
. In the long run, a higher saving rate increases the
a. level of income.
b. growth rate of output.
c. growth rate of productivity.
d. All of the above are correct.
78
. According to studies of international data on economic growth, increasing the saving rate
a. increases the need for capital.
b. reduces the need for capital.
c. leads to somewhat higher GDP growth for a few years.

74

~ANSWER:
b. diminishing returns.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

75

~ANSWER:
b. increases in the capital stock increase output by ever smaller amounts.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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d. can lead to substantially higher GDP growth for a period of several decades.
79
. Other things equal, relatively poor countries tend to
a. grow slower than relatively rich countries; this is called the fall-behind effect.
b. grow slower than relatively rich countries; this is called the Malthus effect.
c. grow faster than relatively rich countries; this is called the catch-up effect.
d. grow faster than relatively rich countries; this is called the constant-returns-to-scale
effect.

80
. The catch-up effect refers to the idea that
a. rich countries aid relatively poor countries so as to "catch them up."
b. savings will always "catch-up" with investment spending.
c. it is easier for a country to grow fast if it starts out relatively poor.
d. if investment spending is low, increased saving will help investment to "catch-up."
81
. The logic behind the catch-up effect is that
a. workers in countries with low income will work harder than workers in countries with
high incomes.
b. the capital stock in rich countries deteriorates more rapidly than the capital stock in
poor countries.
c. new capital adds more to production in a country that doesn’t have much capital than in
a country that already has much capital.
d. None of the above are correct.
82
. In the second half of the twentieth century, which of the following nations benefited a lot
from the catch-up effect?
a. Ethiopia
b. Germany
c. South Korea
d. the United States
83
. Which of the following is consistent with the catch-up effect?
a. The United States had a higher growth rate before 1900 than after.

79

~ANSWER:
c. grow faster than relatively rich countries, this is called the catch-up effect.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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b. After World War II the United States had lower growth rates than war-ravaged
European countries.
c. Although the United States has a relatively high level of output per person, its growth
rate is rather modest compared to some countries.
d. All of the above are correct.
84
. If your American-based firm opens and operates a new plastics factory in Ireland, your firm
is engaging in
a. foreign portfolio investment.
b. foreign financial investment.
c. indirect foreign investment.
d. foreign direct investment.
85
. In the 1800s, Europeans purchased stock in American companies that used the funds to
build railroads and factories. The Europeans made
a. foreign direct investments.
b. foreign indirect investments.
c. foreign portfolio investments.
d. indirect domestic investments.

86
. Foreign saving is used for domestic investment when foreigners engage in
a. foreign direct investment.
b. foreign investment.
c. either a or b.
d. neither a nor b.
87
. Suppose Ford builds a new car factory in Mexico. Future production from such an
investment would
a. increase Mexico's GNP more than it would increase Mexico's GDP.
b. increase Mexico's GDP more than it would increase Mexico's GNP.
c. not affect Mexico's GNP, but increase Mexico's GDP.
d. have no affect on either GDP or GNP.

84

~ANSWER:
d. foreign direct investment.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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88
. The opening of a new American-owned factory in Liberia would tend to increase Liberia’s
GDP more than it increases Liberia’s GNP because
a. some of the income from the factory accrues to people who do not live in Liberia.
b. gross domestic product is income earned within a country by both residents and
nonresidents, whereas gross national product is the income earned by residents of a
country while producing both at home and abroad.
c. all of the income from the factory is included in Liberia’s GDP.
d. All of the above are correct.
89
. If Japanese-owned Honda opens a factory in Ohio,
a. U.S. GNP rises more than U.S. GDP.
b. Japanese GDP rises more than Japanese GNP.
c. Both of the above are correct.
d. None of the above are correct.
90
. Investment from abroad
a. is a way for poor countries to learn the state-of-the-art technologies developed and used
in richer countries.
b. is encouraged by economists.
c. often requires removing restrictions that governments have imposed on foreign
ownership of domestic capital.
d. All of the above are correct.
91
. An organization that tries to encourage the flow of investment to poor countries is the
a. World Bank.
b. Organization of Less Developed Countries.
c. Alliance of Developing Countries.
d. International Development Alliance.
ANSWER: a. World Bank.
88

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

89

~ANSWER:
d. None of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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92
. On average, each year of schooling raises a person's wage by about
a. 1 percent.
b. 5 percent.
c. 10 percent.
d. 15 percent.
93
. Which of the following is generally an opportunity cost of investment in human capital?
a. increased earning potential
b. future job security
c. forgone wages at present
d. All of the above are correct.
94
. An educated person might generate ideas to increase production. These ideas
a. produce external benefits.
b. produce a return to society from education that is greater than the return to the
individual.
c. could justify government subsides for education.
d. All of the above are correct.
95
. The term "brain drain" refers to
a. the emigration of many of the most highly educated workers from poor to rich
countries.
b. the loss of knowledge due to a poor educational system in a country.
c. a situation where the population grows faster than the level of education.
d. a situation where one country robs technological knowledge from another country.
96
. Property rights refer to
a. the ability of people to exercise authority over the resources they own.
b. the ability of government to exercise authority over property owners.
c. a document stating the rights of ownership that accompany owning property.
d. None of the above are correct.
97
. Generally, the main cause of famine is
a. excessive population.

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22 Chapter 24/Production and Growth

b. an inadequate distribution of food.


c. a shortage of food.
d. All of the above are generally the causes of famine.
98
. Inward-oriented policies
a. have generally increased productivity and growth in the countries that pursued them.
b. include imposing tariffs and other trade restrictions.
c. promote production of goods and services within a country that they can produce most
efficiently.
d. All of the above are correct.
99
. Inward-oriented policies
a. primarily concern the development of human capital.
b. in some ways are like prohibiting the use of certain technologies.
c. are generally supported by economists.
d. All of the above are correct.
100
. Outward-oriented policies
a. prevent countries from taking advantage of gains from trade.
b. have led to high growth for the countries that pursued them.
c. receive little support from economists, despite such policies’ success.
d. None of the above are correct.
101
. When a country removes trade barriers and exports pork chops and imports stereos,
a. it is essentially transforming pork chops into stereos.
b. its productivity decreases.
c. its growth slows.
d. its economic well-being decreases while that of the country that sells stereos increases.
102
. Which of the following would not be a good measure of economic well-being, particularly
the standard of living?

98

~ANSWER:
b. include imposing tariffs and other trade restrictions.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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Chapter 24/Production and Growth 23

a. productivity
b. GDP per person
c. GDP
d. All of the above are good measures of the standard of living.
103
. Real GDP per person
a. is found as population divided by GDP.
b. provides for more meaningful comparisons across time and countries than real GDP.
c. minus real GDP per person from the previous period equals the growth rate.
d. All of the above are correct.
104
. All else equal, which of the following would tend to cause GDP per person to rise?
a. high population growth
b. investment in human capital
c. rapid growth in the number of workers
d. All of the above are correct.
ANSWER: b. investment in human capital
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
105
. A rapid increase in the number of workers is likely to
a. raise both real GDP and real GDP per person.
b. raise real GDP, but decrease real GDP per person.
c. raise real GDP per person, but decrease real GDP.
d. decrease both real GDP and real GDP per person.
106
. Which of the following is not correct?
a. Educational attainment tends to be lowest in countries with the highest population
growth.
b. Economists generally believe that decreasing population growth rates can increase
output growth rates.

103

~ANSWER:
b. provides for more meaningful comparisons across time and countries than real GDP.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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24 Chapter 24/Production and Growth

c. China allows only one child per family and couples that violate this rule are subject to
substantial fines.
d. In developed countries, population growth is 3 percent; in many developing countries it
is 5 percent.
107
. The primary reason that U.S. living standards are higher today than they were a century ago
is that
a. human capital has increased.
b. technological knowledge has increased.
c. physical capital per worker has increased.
d. more productive natural resources have been discovered.
108
. Once one person discovers an idea, the idea generally enters society's pool of knowledge,
which many other people can use. Therefore, knowledge is generally a
a. private good.
b. public good.
c. normal good.
d. societal good.
109
. Most technological progress comes from
a. private research by firms.
b. individual inventors.
c. government research.
d. Both a and b are correct.
110
. National defense and knowledge are considered
a. private goods.
b. public goods.
c. normal goods.

107

~ANSWER:
b. technological knowledge has increased.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

108

~ANSWER:
b. public good.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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Chapter 24/Production and Growth 25

d. inappropriate for the government to provide.


111
. Patents turn new ideas into
a. private goods, and increase the incentive to engage in research.
b. private goods, but decrease the incentive to engage in research.
c. public goods, and increase the incentive to engage in research.
d. public goods, and decrease the incentive to engage in research.
112
. Other things the same, a country is likely to have a lower growth rate than other countries if
it
a. has a small population.
b. pursues inward-looking policies.
c. encourages foreign investment.
d. protects property rights.
113
. From 1959 to 1973, productivity, as measured by output per worker hour worked in U.S.
businesses, grew at a rate of
a. 4.0 percent.
b. 3.2 percent.
c. 2.5 percent.
d. 1.8 percent.
114
. From 1973 to 1994, U.S. productivity grew by
a. 3.2 percent.
b. 2.5 percent.
c. 2.0 percent.
d. 1.3 percent.
115
. From 1973 to 1998, U.S. productivity growth was slower than from 1959 to 1973. Which of
the following is correct?
a. Most other developed countries did not experience similar slow downs.
b. The slowdown is primarily due to reduced growth in human capital.
c. The slowdown is primarily due to reduced growth in physical capital.
d. None of the above are correct.
116
. From 1973 to 1998, U.S. productivity growth was slower than from 1959 to 1973. Which of
the following is correct?

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26 Chapter 24/Production and Growth

a. It appears that this may be attributed to a slowdown in technological progress.


b. This continues a downward trend as output growth was higher in periods prior to 1959
to 1973.
c. This slowdown is unique to the United States.
d. None of the above are correct.

117
. Typically, countries in Africa

117

~ANSWER:
c. have high tax rates.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

4
ANSWER:
c. 35 years.
3
ANSWER:
a. 2 percent per year.
1
ANSWER:
d. real GDP per person.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
2

~ANSWER:
d. 10 or more
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

~ANSWER:
b. 2 percent per year, which implies a doubling about every 35 years.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

6
ANSWER:
b. 8
7

~ANSWER:
d. 7 percent per year.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

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Chapter 24/Production and Growth 27

a. had low but positive growth of real GDP per person between 1978 and 1994.
b. have laws and geography that encourage trade.
c. have high tax rates.
d. All of the above are correct.
ANSWER: c. have high tax rates.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

~ANSWER:
a. 10 years.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

9
ANSWER:
c. South Korea
10

~ANSWER:
a. Ethiopia.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

11
ANSWER:
d. Productivity is not closely linked to government policies.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
12
ANSWER:
a. total real output
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
13
ANSWER:
b. productivity.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
14
ANSWER:
a. productivity.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
15
ANSWER:
a. Both levels and growth rates of real GDP per person are diverse across countries.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
16

~ANSWER:

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28 Chapter 24/Production and Growth

118
. While Africa should have grown faster than other developing areas because of relatively
low income per capita, Africa has grown more slowly. This can be explained in part by
a. high trade barriers.
b. low tax rates.
c. excessive saving rates.
d. All of the above are correct.
ANSWER: a. high trade barriers.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

b. 1/2
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

17

~ANSWER:
a. 1870.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

18
ANSWER:
a. Brazil
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
21

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

22
ANSWER:
a. Bangladesh
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
23

~ANSWER:
b. the United Kingdom.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

24

~ANSWER:
c. about 9 percent

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Chapter 24/Production and Growth 29

119
. Which of the following have been suggested as remedies for low growth in many African
countries?
a. reduced corporate taxes
b. cutting import tariffs and ending export taxes on agricultural products
c. focus government spending on basic public health, education, and internal order
d. All of the above are correct.
ANSWER: d. All of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

TYPE: M DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

25

~ANSWER:
c. the accumulation of a growth rate over a period of time.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

26

~ANSWER:
d. 17.5 years
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

29

~ANSWER:
c. 12 years
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

30

~ANSWER:
b. every 7 years
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

31

~ANSWER:
b. 70/x years.

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30 Chapter 24/Production and Growth

120
. Economists differ in their views of the role of the government in promoting economic
growth. According to the text, at the very least, the government should
a. impose trade restrictions to protect the interests of domestic producers and consumers.
b. subsidize key industries.
c. lend support to the invisible hand by maintaining property rights and political stability.
d. limit foreign investment.

TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

32
ANSWER:
d. explains most of the differences across countries in the standard of living.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
33

~ANSWER:
d. divide output by the number of hours worked
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

34

~ANSWER:
c. 3 fish per hour.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 2 RANDOM: Y

35

~ANSWER:
d. Countries that have had higher output growth per person have typically not experienced higher
productivity growth.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

38

~ANSWER:
c. the factors of production.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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Chapter 24/Production and Growth 31

TRUE/FALSE
121
. The average person in a rich country, such as Germany, has income about five times that of
an average person in a poor country such as Nigeria.
ANSWER: F
39

~ANSWER:
c. physical capital
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

40

~ANSWER:
a. physical capital.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

41

~ANSWER:
d. on-the-job training
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

42

~ANSWER:
a. the copy machines in a copy shop
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

43

~ANSWER:
b. the knowledge and skills that workers acquire through education, training, and experience.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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32 Chapter 24/Production and Growth

TYPE:T KEY1: D OBJECTIVE: 1 RANDOM: Y


122
. People in richer countries tend to have more material goods, better nutrition, safer housing,
better healthcare, and longer life expectancy than do people in poorer countries.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
123
. In the United States over the past century, real GDP per person has grown by about 2
percent per year.
ANSWER: T

44

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

45

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

47

~ANSWER:
a. the education you are pursuing
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

48

~ANSWER:
c. the degree she earned from some prestigious university
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

49

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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Chapter 24/Production and Growth 33

TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y


124
. In the United States, average income today is about four times as high as average income a
century ago.
ANSWER: F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
125
. In Hong Kong, Singapore, South Korea, and Taiwan, average income has risen about 7
percent per year in recent decades.
ANSWER: T

50

~ANSWER:
a. oil
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

52

~ANSWER:
d. market prices.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

53

~ANSWER:
b. relative scarcity.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

54

~ANSWER:
c. stable or falling.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

57

~ANSWER:
c. the understanding of the best ways to produce goods and services.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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34 Chapter 24/Production and Growth

TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y


126
. Some African countries, such as Chad, Ethiopia, and Nigeria, have had stagnant income per
person for many years.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
127
. GDP measures both income and output.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

58

~ANSWER:
d. known only by the company that discovers it.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

59

~ANSWER:
b. become common knowledge.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

60

~ANSWER:
a. proprietary technological knowledge.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

61

~ANSWER:
b. available information on how to produce things.
TYPE: Ml KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

62

~ANSWER:
a. technological knowledge is the quality of society's textbooks, whereas human capital is the amount of
time that the population has devoted to reading them.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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Chapter 24/Production and Growth 35

128
. The growth of real GDP is a good gauge of economic prosperity, and the level of real GDP
is a good gauge of economic progress.
ANSWER: F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
129
. Mary produces 40 goods in 8 hours, so her productivity is 320 goods.
ANSWER: F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

63

~ANSWER:
b. the production function.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

64

~ANSWER:
c. double.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

66

~ANSWER:
c. Y/L = A F( 1, K/L, H/L, N/L)
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

67

~ANSWER:
d. physical capital per worker.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

68

~ANSWER:
b. a summary for the four determinants of productivity.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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36 Chapter 24/Production and Growth

130
. Both real GDP per person and growth in real GDP per person vary widely from country to
country.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
131
. If a relatively poor country had grown at 3.5 percent per year for the last 100 years, it would
be a relatively rich country today.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

69

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

71

~ANSWER:
a. requires that society sacrifice consumption goods in the present.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

72

~ANSWER:
b. saving and investment
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

73

~ANSWER:
b. positively related.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

76

~ANSWER:
b. increases productivity.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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Chapter 24/Production and Growth 37

132
. Differences in growth rates have changed the ranking of countries by income substantially
over time.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
133
. Over the last 100 years Japan had a higher average growth rate per year and so now has
more real GDP per person than the United States.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

77

~ANSWER:
a. level of income.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

78

~ANSWER:
d. can lead to substantially higher GDP growth for a period of several decades.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

80

~ANSWER:
c. it is easier for a country to grow fast if it starts out relatively poor.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

81

~ANSWER:
c. new capital adds more to production in a country that doesn’t have much capital than in a country that
already has much capital.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

82

~ANSWER:
c. South Korea

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38 Chapter 24/Production and Growth

134
. In 1870, the United Kingdom was the richest nation in the world, but now has average
income well below that of the United States and Canada.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
135
. International data on the history of real GDP growth rates shows that indeed the rich
countries get richer and the poor countries get poorer.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

83

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

85

~ANSWER:
c. foreign portfolio investment.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

86

~ANSWER:
c. Either a or b.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

87

~ANSWER:
b. increase Mexico's GDP more than it would increase Mexico's GNP.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

90

~ANSWER:
d. All of the above are correct.

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Chapter 24/Production and Growth 39

136
. According to the rule of 70, if a variable grows at the rate of x percent per year, then that
variable doubles in approximately 70(1 - x)/x years.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
137
. 100 years ago Walter put money into a savings account at 3.5 percent. It follows that his
account balance has doubled only 2 times.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

91

~ANSWER:
a. World Bank.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

92

~ANSWER:
c. 10 percent.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

93

~ANSWER:
c. forgone wages at present
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

94

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

95

~ANSWER:
a. the emigration of many of the most highly educated workers from poor to rich countries.

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40 Chapter 24/Production and Growth

138
. If U.S. income grows at the rate of 2 percent per year, and Japanese income grows at the
rate of 3 percent per year, it will take about 35 years for U.S. income to double, but only
about 23 years for Japanese income to double.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
139
. Over the last 100 years Japan had a growth rate of about 3 percent; this means that their real
GDP per person is more than 16 times its value 100 years ago.
ANSWER: T

TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

96

~ANSWER:
a. the ability of people to exercise authority over the resources they own.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

97

~ANSWER:
b. an inadequate distribution of food.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

99

~ANSWER:
b. in some ways are like prohibiting the use of certain technologies.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

100

~ANSWER:
b. have led to high growth for the countries that pursued them.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

101
ANSWER:
a. it is essentially transforming pork chops into stereos.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
102

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Chapter 24/Production and Growth 41

TYPE: T DIFFICULTY: 3 KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y


140
. The large variation in living standards around the world can be attributed to differences in
productivity.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
141
. Productivity is hours worked divided by output produced.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

~ANSWER:
c. GDP
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

104

~ANSWER:
b. investment in human capital
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

105

~ANSWER:
b. raise real GDP, but decrease real GDP per person.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

106

~ANSWER:
d. in developed countries population growth is 3 percent, in many developing countries it is 5 percent.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

109

~ANSWER:
d. Both a and b are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

110

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42 Chapter 24/Production and Growth

142
. Americans have a higher standard of living than Indonesians because American workers are
more productive than Indonesian workers.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
143
. Determinants of productivity include physical capita per worker, human capital per worker,
natural resources per worker, and technological knowledge.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER:
b. public goods.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

111

~ANSWER:
a. private goods, and increase the incentive to engage in research.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

112

~ANSWER:
b. pursues inward-looking policies.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

113

~ANSWER:
b. 3.2 percent.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

114

~ANSWER:
d. 1.3 percent.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

115

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Chapter 24/Production and Growth 43

144
. An important feature of capital is that it is a produced factor of production.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
145
. Physical capital makes workers more productive.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
146
. Flour, sugar, and eggs would be part of a bakery’s physical capital.
ANSWER: F

~ANSWER:
d. None of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

116

~ANSWER:
a. It appears that this may be attributed to a slowdown in technological progress.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

118

~ANSWER:
a. high trade barriers.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

119

~ANSWER:
d. All of the above are correct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

120

~ANSWER:
c. lend support to the invisible hand by maintaining property rights and political stability.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

121

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44 Chapter 24/Production and Growth

TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y


147
. Physical capital is the economist's term for the knowledge and skills that workers acquire
through education, training, and experience.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
148
. Improvements in a country’s educational system eventually lead to an increase in that
country’s human capital.
ANSWER: T

~ANSWER:
F
TYPE:T KEY1: D OBJECTIVE: 1 RANDOM: Y

122

~ANSWER:
T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

123

~ANSWER:
T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

124

~ANSWER:
F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

125

~ANSWER:
T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

126

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Chapter 24/Production and Growth 45

TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y


149
. Human capital is a nonproduced factor of production.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
150
. Students can be viewed as workers helping to produce human capital.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER:
T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

127

~ANSWER:
T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

128

~ANSWER:
F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

129

~ANSWER:
F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y

130

~ANSWER:
T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

131

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46 Chapter 24/Production and Growth

151
. Natural resources are produced inputs.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
152
. Oil is a nonrenewable natural resource.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
153
. Kuwait and Saudi Arabia are rich largely because of their natural resources.
ANSWER: T

~ANSWER:
T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

132

~ANSWER:
T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

133

~ANSWER:
F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

134

~ANSWER:
T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

135

~ANSWER:
F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

136

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Chapter 24/Production and Growth 47

TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y


154
. Changes in the market prices of most resources indicate that they are becoming increasingly
scarce.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
155
. Technological progress often yields ways to avoid the natural resource limits to growth.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER:
F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

137

~ANSWER:
F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

138

~ANSWER:
T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

139

~ANSWER:
T
TYPE: T DIFFICULTY: 3 KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

140

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

141

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48 Chapter 24/Production and Growth

156
. Technological knowledge is the understanding of the best ways to produce goods and
services.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
157
. Technological knowledge may be either proprietary or common.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

142

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

143

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

144

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

145

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

146

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 24/Production and Growth 49

158
. Human capital is not the same as technological knowledge.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
159
. A production function describes the relationship between the quantity of inputs used in
production and the quantity of output from production.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

147

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

148

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

149

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

150

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

151

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50 Chapter 24/Production and Growth

160
. If a production function has constant returns to scale, then simply by doubling labor, output
will double.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
161
. A production function with constant returns to scale can be used to show that output per
worker depends on inputs per worker.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

152

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

153

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

154

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

155

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

156

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Chapter 24/Production and Growth 51

162
. An economy can increase its rate of economic growth by reducing current consumption to
increase its rate of domestic capital investment.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
163
. Countries that devote a large share of GDP to investment tend to have high growth rates.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

157

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

158

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

159

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

160

~ANSWER:
F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

161

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52 Chapter 24/Production and Growth

164
. The government cannot change the savings rate.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
165
. If average income in the United States is 15 times the average income in Mexico, an
increase in capital investment of $500 per worker will likely increase productivity more in
Mexico than in the United States.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

~ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

162

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

163

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

164

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

165

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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Chapter 24/Production and Growth 53

166
. When diminishing returns has set in, adding more capital will decrease GDP per person.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
167
. The catch-up effect suggests that, other things equal, poor countries grow more rapidly than
rich countries.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
168
. The catch-up effect is a result of diminishing returns to capital.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
169
. Other things the same, a country with low income per person can have a higher growth rate
than a country with a high income per person even if the countries have identical saving
rates.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
170
. With approximately the same share of GDP devoted to capital investment, the United States
grew more rapidly than South Korea did during the past few decades.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
171
. In the long run, a higher saving rate leads to higher growth rates of both productivity and
income.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

172
. It may take decades for a poor country to catch up with a rich one.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
173
. Studies of international data show that when other variables that affect productivity are
controlled for, the catch-up effect is confirmed.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
174
. If U.S. citizens open a factory in Singapore, Singapore's GDP will increase by more than
Singapore's GNP.
ANSWER: T

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54 Chapter 24/Production and Growth

TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y


175
. The only way a country can increase its rate of growth is by sacrificing current
consumption.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
176
. Foreign investment increases an economy’s capital stock and wages.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
177
. When Elmo, a U.S. citizen, buys stock in a toy company in Uruguay, he is engaging in
foreign portfolio investment.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
178
. When Catherine, a U.S. citizen, opens a dental floss factory in Haiti, she is engaging in
foreign direct investment.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
179
. The World Bank obtains funds from the world's advanced countries and uses these
resources to make loans to developing countries for investment in new capital.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
180
. In the United States, each year of schooling raises a person's wage on average by about 10
percent.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
181
. Education increases the stock of human capital and so increases the standard of living.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
182
. Some economists argue that the government should subsidize education because human
capital generates positive externalities.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
183
. The “brain drain” of highly educated workers from poor nations to rich nations benefits the
workers who move without hurting the standard of living of those who stay behind.
ANSWER: F

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Chapter 24/Production and Growth 55

TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y


184
. Other things equal, a country with a legal and political structure that defines and enforces
property rights is likely to have a greater degree of economic prosperity than one without
such a structure.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
185
. Countries that lack property rights and political stability have lower investment, and so
lower growth rates.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
186
. Recent famines have primarily resulted from rapid population growth.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
187
. Poor countries can increase their rates of economic growth by pursuing outward-oriented
policies.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
188
. Countries that pursue outward-oriented policies increase their rates of growth, but do so at
the expense of the growth rate of countries with which they trade.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
189
. Countries with high rates of population growth tend to have low growth rates of average
income.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
190
. Equal treatment of women is one way for less developed countries to reduce the rate of
population growth.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
191
. Educational attainment tends to be low in countries with high population growth.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
192
. Knowledge is frequently a public good.
ANSWER: T

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56 Chapter 24/Production and Growth

TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y


193
. The U.S. government has played a large role in encouraging research and development.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
194
. If the rate of growth of productivity in the United States had not fallen after 1973, the real
income of the average American would be 15 percent higher today.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
195
. The slowdown in productivity growth since the mid-1970s occurred in other developed
countries, not just the United States.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
196
. Many economists blame a slowdown in labor force growth for the reduction in the rate of
growth of productivity since the mid-1970s.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
197
. As of 1998, the effects of computers on the economy had been insufficient to reverse the
productivity slowdown.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
198
. Compared to the 1959 to 1973 period, real GDP growth in the United States from 1973 to
1998 was low. However, compared to other periods in the last 125 years, both of these
periods were ones of high growth.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
199
. Economists believe that, at the very least, the government can encourage economic growth
by maintaining property rights and political stability.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
200
. Economists disagree about whether the government can encourage economic growth by
subsidizing specific industries that might be important for technological progress.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

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Chapter 24/Production and Growth 57

SHORT ANSWER:
201
. Large differences in income are reflected in large differences in the quality of life. What are
some other variables that measure quality of life more directly and tend to be greater in rich
countries than in poor ones?
ANSWER: Richer countries have more automobiles, televisions, and telephones per person.
They also tend to have better nutrition, safer housing, better health care, and longer life
expectancy.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
202
. Compare the average income (real GDP per capita) of the United States to developing
countries such as China and Bangladesh
ANSWER: The average income (real GDP per capita) in the United States was $28,740 in 1997,
approximately 8 times as high as in China ($3,570 in 1997), and more than 25 times as high
as in Bangladesh($1,050 in 1997).
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
203
. Compute real GDP per person for each of the countries below. Comment on why real GDP
per person is more informative than real GDP alone.
Country Population Real GDP
Switzerland 7million 284,119 million
Canada 30 million 580,872 million
Mexico 96 million 386,059 million
ANSWER: Real GDP per person is computed as real GDP divided by population. For
Switzerland it is 284,119/7 = $40,588. For Canada it is 580,872/30 = $19,364. For Mexico
it is 368,059/96 = $4,021.
Countries that have larger populations tend to have more workers and so more real GDP.
Comparing, the real GDP numbers themselves is misleading. Mexico’s real GDP is about
40 percent more than Switzerland’s, but Mexico’s per person real GDP is about one-tenth
that of Switzerland.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
204
. The level of U.S. nominal GDP in 1997 was about 19 times what it was in 1957. Yet it is
clear that the typical person living in 1997 did not have 19 times as much stuff as a person
living in 1957. How can these two facts be reconciled?
ANSWER: Nominal GDP has increased partly because prices increased. The dollars that people
earned in 1997 did not buy as many goods as they did back in 1957. The increase in
nominal GDP also reflects a growing population and so a growing number of workers. To
compare how much a typical person had in 1957 with how much a typical person had in
1997 we need to have numbers on real GDP per person.

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58 Chapter 24/Production and Growth

(Notes concerning some specific details not given in the text: From 1957 to 1997 real GDP
person more or less doubled. Population in 1997 was about 1.6 times population in 1957,
and prices in 1997 were about 5 times those in 1957.)
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM:
205
. Compare the U.S. growth rate of average income per person to that of a couple of other
countries.
ANSWER: Real per capita GDP grew at an average rate of 1.75 percent per year in the United
States between 1870 and 1997, at an average annual rate of 2.82 percent in Japan between

205

~ANSWER:
Real per capita GDP grew at an average rate of 1.75 percent per year in the United States between 1870
and 1997, at an average annual rate of 2.82 percent in Japan between 1890 and 1990, and at an average
annual rate of 0.08 percent in Bangladesh between 1900 and 1987.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

166

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

167

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

168

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

169

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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Chapter 24/Production and Growth 59

1890 and 1990, and at an average annual rate of 0.08 percent in Bangladesh between 1900
and 1987.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
206
. Use the data below to find out the growth of income per person (over the entire period, not
an annual basis) between the two years listed.
Year Real GDP (1996 prices) Population
1989 6,600,000 million 247 million
1999 8,900,000 million 273 million

170

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

171

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

172
ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
173

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

174

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

175

~ANSWER:

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60 Chapter 24/Production and Growth

ANSWER: Income per person in 1989 was $6,600,000/247 = about $26,720. Income per person
in 1999 was $8,900,000/273 = about $32,600. Income per person grew by (32,600 -
26,720)/26,720 = 22 percent.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
207
. Using the “rule of 70,” calculate about how many years it would take for a country's real
per capita GDP to double if the growth rate is:
a. 1 percent
b. 2 percent
c. 3 percent

F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

176

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

177

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

178

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

179

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

180

~ANSWER:

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Chapter 24/Production and Growth 61

d. 7 percent
e. 10 percent
ANSWER: a. 70 years
b. 35 years
c. 23 1/3 years
d. 10 years
e. 7 years
TYPE: S KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

181

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

182

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

183

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

184

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

185

~ANSWER:

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62 Chapter 24/Production and Growth

208
. Over the past century, U.S. real income per person has grown at an average annual rate of
about 1.75 percent per year. How many years does it take for income to double if it
continues to grow at this rate? Considering how many years it takes for income to double
and that current income per person is about $28,750, what will U.S. income be 200 years
from now if the economy continues to grow at this rate?
ANSWER: To find how long it takes output to double we use the rule of 70. Since 70/1.75 = 40,
it takes 40 years for output to double. If output doubles every 40 years, it will double
200/40 = 5 times in the next 200 years and so be $28,750 x 2 x 2 x 2 x 2 x 2 = $28,750 x 32
= $920,000.

T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

186

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

187

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

188

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

189

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

190

~ANSWER:

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TYPE: S KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

191

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

192

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

193

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

194

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

195

~ANSWER:

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64 Chapter 24/Production and Growth

209
. Over the past century Brazil had an average annual growth rate of 2.4 percent, while the
United States had an average annual growth rate of 1.75 percent. Brazil’s real GDP per
person in 1997 was about $6,250 while that of the United States was about $28,750. About
how many times as high as Brazil’s real GDP per person was that of the United States? If
these growth rates continue for another 120 years, how will the answer to this question be
different? Show and explain your work. Hint: Use the “rule of 70”to find out about how
many times each country’s output doubles in 120 years.
ANSWER: U.S. income per person is $28,750/$6,250 = 4.6 times Brazilian income per person.
With a growth rate of 1.75, income doubles about every 70/1.75 = 40 years. So in 120 years

T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

196

~ANSWER:
F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

197

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

198

~ANSWER:
T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

199

~ANSWER:
T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

200

~ANSWER:

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Chapter 24/Production and Growth 65

U.S. income would double 120/40 = 3 times and so be $28,750 x 2 x 2 x 2 = $230,000.


With a growth rate of 2.4, income doubles about every 70/2.4 = 29 years. So, in 120 years
Brazilian income will have doubled 120/29 = about 4 times and so be about $6,250 x 2 x 2
x 2 x 2 = $100,000. Therefore, U.S. income would be $230,000/$100,000 = 2.3 times
Brazilian income.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

201

~ANSWER:

Richer countries have more automobiles, televisions, and telephones per person. They also tend to have
better nutrition, safer housing, better health care, and longer life expectancy.
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202

~ANSWER:
The average income (real GDP per capita) in the United States was $28,740 in 1997, approximately 8 times
as high as in China ($3,570 in 1997), and more than 25 times as high as in Bangladesh($1,050 in 1997).
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

203

~ANSWER:
Real GDP per person is computed as real GDP divided by population. For Switzerland it is 284,119/7 =
$40,588. For Canada it is 580,872/30 = $19,364. For Mexico it is 368,059/96 = $4,021.
Countries that have larger populations tend to have more workers and so more real GDP. Comparing, the
real GDP numbers themselves is misleading. Mexico’s real GDP is about 40 percent more than
Switzerland’s, but Mexico’s per person real GDP is about one-tenth that of Switzerland.

204

~ANSWER:

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66 Chapter 24/Production and Growth

210
. Though we lack accurate statistics on real GDP per person from hundreds of years ago, we
know that consistent GDP growth above zero for any extended time is a relatively recent
historical event. To understand why, first compute how many years it takes output to double
if the growth rate is even just 1.4 percent. Your answer tells you how many years ago
income was half of what it would be today if the growth rate had been 1.4 percent. What
fraction of today’s income per person would output have been 500 years ago?
ANSWER: For each 70/1.4 = 50 years we go back output would be half of its current level. If we
go back 500 years ago, we would have to half output 10 times. Thus, output would only be

Nominal GDP has increased partly because prices increased. The dollars that people earned in 1997 did
not buy as many goods as they did back in 1957. The increase in nominal GDP also reflects a growing
population and so a growing number of workers. To compare how much a typical person had in 1957
with how much a typical person had in 1997 we need to have numbers on real GDP per person.
(Notes concerning some specific details not given in the text: From 1957 to 1997 real GDP person more or
less doubled. Population in 1997 was about 1.6 times population in 1957, and prices in 1997 were about 5
times those in 1957.)

206
ANSWER:
Income per person in 1989 was $6.600,000/247 = about $26,720. Income per person in 1999 was
$8,900,000/273 = about $32,600. Income per person grew by (32600-26720)/26720 = 22 percent.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
207
ANSWER:
a. 70 years
b. 35 years
c. 23 1/3 years
d. 10 years
e. 7 years
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208

~ANSWER:
To find how long it takes output to double we use the rule of 70. Since 70/1.75 = 40, it takes forty years for
output to double. If output doubles every 40 years, it will double 200/40 = 5 times in the next 200 years
and so be $28,750x2x2x2x2x2 = $28,750x32 = $920,000.
TYPE: S KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

209

~ANSWER:
US income per person is $28,750/$6,250 = 4.6 times Brazilian income per person. With a growth rate of
1.75, income doubles about every 70/1.75 = 40 years. So in 120 years US income would double 120/40 = 3
times and so be $28,750x2x2x2 = $230,000. With a growth rate of 2.4 income doubles about every 70/2.4 =

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Chapter 24/Production and Growth 67

1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 = (1/2)10 = 1/1024. Even using the
income of a rich country, this would be less than $30 per person.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
211
. In the simplest terms, explain what causes the tremendous variation in living standards
observed around the world.
ANSWER: In the simplest terms, the variation in living standards across nations is a result of the
variation in labor productivity across nations.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

29 years. So, in 120 years Brazilian income will have doubled 120/29 = about 4 times and so be about
$6,250x2x2x2x2 = $100,000. Therefore, US income would be $230,000/$100,000 = 2.3 times Brazilian
income.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

210

~ANSWER:
For each 70/1.4 = 50 years we go back output would be half of its current level. If we go back 500 years
ago, we would have to half output 10 times. Thus, output would only be 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x
1/2 x 1/2 x 1/2 x 1/2 = (1/2)10 = 1/1024. Even using the income of a rich country, this would be less than $30
per person.
TYPE: S DIFFICULTY: 3 KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

211

~ANSWER:
In the simplest terms, the variation in living standards across nations is a result of the variation in labor
productivity across nations.
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212
. Why is productivity related to the standard of living? In your answer be sure to explain
what productivity and standard of living mean.
ANSWER: The standard of living is a measure of how well people live. Income per person is an
important dimension of the standard of living and is positively correlated with other things
such as nutrition and life expectancy that make people better off. Productivity measures
how much people can produce in an hour. As productivity increases, people can produce
more (and use less to produce the same amount) and so their standard of living increases.
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213
. What are the factors that determine labor productivity?
ANSWER: The factors that determine labor productivity include the amounts of physical capital
(equipment and structures), human capital (knowledge and skills), and natural resources
available to workers, as well as the state of technological knowledge in society.
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214
. What is a production function? Write an equation for a typical production function, and
explain what each of the terms represents.
ANSWER: A production function is a mathematical representation of the relationship between
the quantity of inputs used in production and the quantity of output from production. A
typical production function could be written as Y = A F(L, K, H, N), where Y denotes the
quantity of output, L the quantity of labor, K the quantity of physical capital, H the quantity
of human capital, N the quantity of natural resources, and A is a variable that reflects the
available production technology.

212

~ANSWER:
The standard of living is a measure of how well people live. Income per person is an important
dimension of the standard of living and is positively correlated with other things such as nutrition and
life expectancy that make people better off. Productivity measures how much people can produce in an
hour. As productivity increases, people can produce more (and use less to produce the same amount) and
so their standard of living increases.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

213

~ANSWER:
The factors that determine labor productivity include the amounts of physical capital (equipment and
structures), human capital (knowledge and skills), and natural resources available to workers, as well as
the state of technological knowledge in society.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y


215
. What is meant by constant returns to scale?
ANSWER: When there is constant returns to scale, if all factors were x times as high, output
would be x times as high.
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216
. List the determinants of productivity and then provide one example of each for a furniture
factory.
ANSWER: physical capital—lathes
human capital—the manager’s understanding of how the factory works
natural resources —wood
echnological knowledge—knowledge about the best way to make furniture
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215

~ANSWER:
When there is constant returns to scale if all factors were x times as high, output would be x times as
high.
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216

~ANSWER:
physical capital – lathes
human capital – the manager’s understanding of how the factory works

214

~ANSWER:
A production function is a mathematical representation of the relationship between the quantity of inputs
used in production and the quantity of output from production. A typical production function could be
written as Y = A F(L, K, H, N), where Y denotes the quantity of output, L the quantity of labor, K the
quantity of physical capital, H the quantity of human capital, N the quantity of natural resources, and A
is a variable that reflects the available production technology.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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217
. Are natural resources necessary to ensure prosperity and growth of an economy? Are
natural resources sufficient to ensure prosperity and growth?
ANSWER: Natural resources are one of the factors of production. However, a country need not
have a lot of natural resources in order to be rich—consider Japan and Switzerland. To a
large extent, natural resources are what an economy and its technology make of them. Some
countries have abundant natural resources and so are rich—consider the major oil
producing countries. However, natural resources are just one of several factors of
production. Obviously countries in the past had abundant natural resources and yet lacked
the physical capital, human capital, and technology to produce much with them. Further,
while abundant natural resources may make a country rich, a given stock of natural
resources does not create growth in income per person.
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218
. What is the difference between human capital and technology?
ANSWER: Technology is society’s understanding of production techniques. Human capital is
the labor force’s understanding of these ideas. A society may have lots of information about
how to produce goods, but still have lots of people who know little of this information. For
example, in the United States there exists information about how best to use a butter churn
and how to make lye soap, but most people know nothing about producing these goods by
hand. (Can someone help me set the clock on my VCR?)
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
219
. A farm family working for a year can now produce many, many times the output of a farm
family in the colonial United States. Explain why this means that productivity has
increased. What determinant of productivity is probably most responsible for this increase?
Defend your answer.
ANSWER: Productivity is the amount produced per hour of labor. If a farm family can produce
much more in a year, on average they produce much more in an hour as well. Technology is
likely responsible for most of the increase in productivity. A farm family today clearly has
more capital, but not enough to explain such a large increase. A modern farm family’s
understanding of agriculture is better than their colonial counterparts, but not so much
because they had more education as because society’s understanding of how to produce

217

~ANSWER:
Natural resources are one of the factors of production. However, a country need not have a lot of natural
resources in order to be rich – consider Japan and Switzerland. To a large extent, natural resources are
what an economy and its technology make of them. Some countries have abundant natural resources and
so are rich – consider the major oil producing countries. However, natural resources are just one of
several factors of production. Obviously countries in the past had abundant natural resources and yet
lacked the physical capital, human capital, and technology to produce much with them. Further, while
abundant natural resources may make a country rich, a given stock of natural resources does not create

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food has increased. It is difficult to imagine a very well-educated farm family with
considerable capital but restricted to using colonial technology, producing more than a
small fraction of what could be produced by a farm family with modest modern education
and capital taking advantage of modern technology.
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220
. Economists generally do not believe that limited natural resources impose a binding
constraint on income growth. Why?
ANSWER: Technology allows people to do more with fewer or alternative resources. Examples
in the text include more fuel-efficient automobiles, better recycling, substituting plastic and
fiber optics for cable, and improved insulation. Market prices provide a measure of scarcity.
Once we have adjusted for inflation, market prices of natural resources are steady or falling.
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221
. Why are saving and investment important if a society is to become more productive?
ANSWER: One way for society to become more productive is to generate a larger capital stock.
Because capital is a produced factor of production, society can change the amount of capital
it has by producing more capital goods. If more capital goods are produced, however, fewer

growth in income per person.


TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

220

~ANSWER:
Technology allows people to do more with fewer or alternative resources. Examples in the text include
more fuel-efficient automobiles, better recycling, substituting plastic and fiber optics for cable, and
improved insulation. Market prices provide a measure of scarcity. Once we have adjusted for inflation,
market prices of natural resources are steady or falling.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

221

~ANSWER:
One way for society to become more productive is to generate a larger capital stock. Because capital is a
produced factor of production, society can change the amount of capital it has by producing more capital
goods. If more capital goods are produced, however, fewer consumer goods can be produced. Hence,
consumers must consume less and save more. Therefore, if a society wishes to increase future
productivity by increasing the capital stock, the society can do so by investing more and saving more in
the present.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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72 Chapter 24/Production and Growth

consumer goods can be produced. Hence, consumers must consume less and save more.
Therefore, if a society wishes to increase future productivity by increasing the capital stock,
the society can do so by investing more and saving more in the present.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

218

~ANSWER:
Technology is society’s understanding of production techniques. Human capital is the labor force’s
understanding of these ideas. A society may have lots of information about how to produce goods, but
still have lots of people who know little of this information. For example, in the United States there exists
information about how best to use a butter churn and how to make lye soap, but most people know
nothing about producing these goods by hand. (Can someone help me set the clock on my VCR?)
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

219

~ANSWER:
Productivity is the amount produced per hour of labor. If a farm family can produce much more in a
year, on average they produce much more in an hour as well. Technology is likely responsible for most of
the increase in productivity. A farm family today clearly has more capital, but not enough to explain such
a large increase. A modern farm family’s understanding of agriculture is better than their colonial
counterparts, but not so much because they had more education as because society’s understanding of
how to produce food has increased. It is difficult to imagine a very well-educated farm family with
considerable capital but restricted to using colonial technology, producing more than a small fraction of
what could be produced by a farm family with modest modern education and capital taking advantage of
modern technology.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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222
. What does the statistical evidence show concerning the correlation between the share of
GDP devoted to investment and growth of income per person? Does this imply anything
about causation? What does economic theory suggest about which variable causes the other
to change?
ANSWER: There is a positive statistical correlation between the share of GDP devoted to
investment and the rate of economic growth. The correlation does not prove causal
direction. However, economic theory provides strong reason to believe that higher shares of
GDP devoted to investment leads to higher rates of economic growth. The more an
economy invests the more capital an economy accumulates and the more capital an
economy has, the more it can produce.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
223
. What is the "catch-up effect" in economic growth, and how is it related to the law of
diminishing returns?
ANSWER: The catch-up effect is based on the idea that it is easier for a country to grow fast if it
starts out relatively poor. This is because poor countries have very low capital–labor ratios,
hence, a given increase in capital per worker will have a large impact on productivity in
those countries. On the other hand, the law of diminishing returns states that rich nations,

223

~ANSWER:
The catch-up effect is based on the idea that it is easier for a country to grow fast if it starts out relatively
poor. This is because poor countries have very low capital-labor ratios, hence, a given increase in capital
per worker will have a large impact on productivity in those countries. On the other hand, the law of
diminishing returns states that rich nations, which already have high capital-labor ratios, experience only
a small increase in productivity from a given increase in capital per worker. Hence, a given rate of
investment in a poor country leads to a higher rate of economic growth than does the same rate of
investment in a rich country. As a country develops, growth rates slow down. In the long run, the higher
saving rate leads to a higher level of productivity and income, but not to higher rates of growth in those
variables.
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222

~ANSWER:
There is a positive statistical correlation between the share of GDP devoted to investment and the rate of
economic growth. The correlation does not prove causal direction. However, economic theory provides
strong reason to believe that higher shares of GDP devoted to investment leads to higher rates of
economic growth. The more an economy invests the more capital an economy accumulates and the more
capital an economy has, the more it can produce.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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74 Chapter 24/Production and Growth

which already have high capital–labor ratios, experience only a small increase in
productivity from a given increase in capital per worker. Hence, a given rate of investment
in a poor country leads to a higher rate of economic growth than does the same rate of
investment in a rich country. As a country develops, growth rates slow down. In the long
run, the higher saving rate leads to a higher level of productivity and income, but not to
higher rates of growth in those variables.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
224
. The catch-up effect says that countries with low income can grow faster than countries with
higher income. However, in statistical studies that include many diverse countries we do
not observe the catch-up-effect unless we control for other variables that affect
productivity. Considering the determinants of productivity, list and explain some things that
would tend to prohibit or limit a poor country’s ability to catch up with the rich ones.
ANSWER: The argument that poor countries will tend to catch up with rich ones is based on the
idea that another unit of capital will increase output more in a country that has little capital
than one that has much capital. So, for a given share of GDP devoted to investment, a poor
country will grow faster than a rich one.

This argument assumes that other things are the same, but share of GDP invested may be
lower in a poor country and the productivity of investment may be less. A politically
unstable environment where property rights are unprotected or not secure tends to
discourage investment. A country that has limited trade because of legal restrictions or
geography cannot focus on producing what it produces best and so has lower productivity.
To get the most out of investment, or even simply to use some types of new investment,
requires having workers who have acquired some basic human capital.
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224

~ANSWER:
The argument that poor countries will tend to catch up with rich ones is based on the idea that another
unit of capital will increase output more in a country that has little capital than one that has much capital.
So, for a given share of GDP devoted to investment, a poor country will grow faster than a rich one.
This argument assumes that other things are the same, but share of GDP invested may be lower in a poor
country and the productivity of investment may be less. A politically unstable environment where
property rights are unprotected or not secure tends to discourage investment. A country that has limited
trade because of legal restrictions or geography cannot focus on producing what it produces best and so
has lower productivity. To get the most out of investment, or even simply to use some types of new
investment, requires having workers who have acquired some basic human capital.

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225
. A puzzle: The share of GDP devoted to investment was similar for the United States and
South Korea over the last 40 years. However, South Korea had a 6 percent growth rate of
average annual income, while the United States had only a 2 percent growth rate over that
last 40 years. How can this be explained?
ANSWER: The solution to the puzzle 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 capital poor
country could increase their output considerably with even a little more capital.
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226
. Is there a way for a country to increase its investment in capital without increasing domestic
saving? Explain.
ANSWER: A country can increase its investment in capital through borrowing from foreigners.
This kind of investment can take the form of foreign direct investment, where a capital
investment is owned and operated by a foreign entity, or through foreign portfolio
investment, where the real capital investment is financed with foreign money but operated
by domestic residents.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

225

~ANSWER:
The solution to the puzzle 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 capital poor country could increase their output considerably
with even a little more capital.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

226

~ANSWER:
A country can increase its investment in capital through borrowing from foreigners. This kind of
investment can take the form of foreign direct investment, where a capital investment is owned and
operated by a foreign entity, or through foreign portfolio investment, where the real capital investment is
financed with foreign money but operated by domestic residents.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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227
. Classify each of the following as foreign direct investment or foreign portfolio investment
or neither.
a. A Mexican company builds and operates a textbook publishing company in Texas.
b. Jerry, a U.S. citizen, buys stock in a Japanese computer company.
c. Jane, a Canadian citizen, buys stock in a Canadian brewing company.
d. Judy buys bonds issued by an Italian movie studio.
ANSWER: a. This is foreign direct investment.
b. This is foreign portfolio investment.
c. This is neither foreign direct investment nor foreign portfolio investment, since Jane is
purchasing assets of a domestic company.
d. This is foreign portfolio investment
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
228
. Suppose that a firm from Poland opens a factory in the United States. How does this affect
the GDP and GNP of the United States? How does it affect the GDP and GNP of Poland?
Explain your answer.
ANSWER: GDP includes income earned within a country by residents and nonresidents. GNP
includes production by residents of a country, regardless of where it is produced. So, the
factory raises the GDP of the United States, but not of Poland. It raises the GNP of both
countries since some of the income generated by the factory will go to U.S. workers and
some will go to the Polish owners. All of the income generated by the factory is included in
U.S. GDP, but only part of it is included in GNP, so GDP rises by more than GNP.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

227

~ANSWER:
a. This is foreign direct investment.
b. This is foreign portfolio investment.

228

~ANSWER:
GDP includes income earned within a country by residents and nonresidents. GNP includes production
by residents of a country, regardless of where it is produced. So, the factory raises the GDP of the United
States, but not of Poland. It raises the GNP of both countries since some of the income generated by the
factory will go to U.S. workers and some will go to the Polish owners. All of the income generated by the
factory is included in U.S. GDP, but only part of it is included in GNP, so GDP rises by more than GNP.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

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229
. How do economists view education as a way of increasing the productivity of a society?
ANSWER: Economists believe that education, which represents investment in human capital, is
at least as important as is investment in real capital in raising productivity. People with
more knowledge are likely to be able to produce more and to take advantage of changing
technology.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
230
. In what way might education provide positive externalities for society?
ANSWER: An educated person might invent new products or generate new ideas about how best
to produce goods and services. An educated person might discover a cure for cancer. As
these ideas and developments enter society's pool of knowledge, so everyone can use them,
they are an external benefit of education.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
231
. In addition to investment in physical and human capital, what other public policies might a
country adopt to increase productivity?
ANSWER: In addition to investment in physical and human capital, a country might increase
productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c)
controlling population growth, and (d) promoting research and development.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
232
. Why are property rights important for the growth of a nation's standard of living?
ANSWER: Property rights are an important prerequisite for the price system to work in a market
economy. If an individual or company is not confident that claims over property or over the
income from property can be protected, or that contracts can be enforced, there will be little
incentive for individuals to save, invest, or start new businesses. Likewise, there will be
little incentive for foreigners to invest in the real or financial assets of the country. The
distortion of incentives will reduce efficiency in resource allocation and will reduce saving
and investment, hence, will reduce the standard of living.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
233
. How might political instability depress a nation's standard of living?
ANSWER: Political instability interferes with the enforcement of property rights, hence, it
reduces people's incentives to save, invest, and start new businesses. It also reduces
incentives for foreigners to invest in the country. Lower saving and investment reduces
productivity. Fewer new businesses mean fewer new jobs and less technological progress.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
234
. How do inward-oriented policies affect a nation's growth?
ANSWER: Most economists believe that poor nations are better off pursuing outward-oriented
policies that promote free trade. Countries that use their comparative advantage in trade are,
in effect, helping themselves through the gains from trade in the same way that nations that

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
78 Chapter 24/Production and Growth

develop new technology raise their standard of living. Hence, a country that eliminates
trade restrictions will experience the same kind of economic growth that would occur after
a major technological advance. However, inward-oriented trade policies are like a country
choosing to restrict the use of superior technologies.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
235
. Have poor countries that followed outward-oriented policies had relatively low or relatively
high output growth rates? What would explain this?
ANSWER: Countries like South Korea, Singapore, and Taiwan that initiated outward-oriented
policies have had high growth rates. This likely is the result of gains from trade that allow
these countries to produce what they can produce comparatively cheap, and then trade these
goods to get funds to buy goods they need from countries that produce those goods
relatively cheap.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
236
. Your first impression might be that higher population growth would lead to higher
standards of living because there would be more workers. Yet countries with high
population growth tend to have lower standards of living. In what ways can high population
growth lead to a lower standard of living?
ANSWER: It is important to remember that income per person is closely tied to the standard of
living. With greater population, the amount of other inputs per worker falls. This decrease
results in lower productivity, and so lower output per worker. This is evident for example
for human capital where a rapidly increasing population burdens the educational system.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
237
. Countries have tried various methods to increase their standard of living by reducing
population growth. As an economist interested in incentives rather than coercion, what kind
of policy would you recommend to slow population growth?
ANSWER: Since bearing a child has an opportunity cost, policies designed to increase the
opportunity cost of bearing children would likely reduce population growth rates. In
particular, women with the opportunity to receive a good education and desirable
employment tend to want to have fewer children than do those with fewer opportunities
outside the home. Hence, policies designed to increase educational and employment
opportunities for women will likely reduce population growth rates without coercion.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
238
. How is knowledge a public good?
ANSWER: Once a person discovers an idea, the idea enters society's pool of knowledge, which
many other people can use. It is difficult or impossible to exclude others from using your
ideas, and so difficult or impossible to collect payment from those who use your ideas.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 24/Production and Growth 79

239
. Do you think patent laws help or hurt economic growth? Explain.
ANSWER: Patent laws encourage invention and innovation through granting property rights to
the patented product or process. In this way, the laws encourage technological progress and
economic growth. By protecting the product or process from competition, however, the
patent laws slow down the diffusion of the developed technology. Most economists believe
that the advantages of patents in encouraging innovation outweigh the disadvantages of
patents in slowing down the rate of technological diffusion.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

239

~ANSWER:
Patent laws encourage invention and innovation through granting property rights to the patented
product or process. In this way, the laws encourage technological progress and economic growth. By
protecting the product or process from competition, however, the patent laws slow down the diffusion of
the developed technology. Most economists believe that the advantages of patents in encouraging
innovation outweigh the disadvantages of patents in slowing down the rate of technological diffusion.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

229

~ANSWER:
Economists believe that education, which represents investment in human capital, is at least as important
as is investment in real capital in raising productivity. People with more knowledge are likely to be able
to produce more and to take advantage of changing technology.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

230

~ANSWER:
An educated person might invent new products or generate new ideas about how best to produce goods
and services. An educated person might discover a cure for cancer. As these ideas and developments
enter society's pool of knowledge, so everyone can use them, they are an external benefit of education.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

231

~ANSWER:
In addition to investment in physical and human capital, a country might increase productivity by (a)
specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth,
and (d) promoting research and development.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
80 Chapter 24/Production and Growth

240
. In what ways can government encourage economic growth through technological
improvement? Has the U.S. government been active in this area? Explain.
ANSWER: The two major ways government can encourage technological improvement are the
patent system, which conveys property rights to the holder of the patent for a given number
of years, and through the support of research and development activities in the economy.
Both of these methods encourage innovation and invention by providing a larger reward for
successful technology, and by reducing the private cost of developing technology. The U.S.
government has strong patent protection, and has supported research and development for
well over a century. Whereas, in the last century, government-sponsored research was

TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

232

~ANSWER:
Property rights are an important prerequisite for the price system to work in a market economy. If an
individual or company is not confident that claims over property or over the income from property can
be protected, or that contracts can be enforced, there will be little incentive for individuals to save, invest,
or start new businesses. Likewise, there will be little incentive for foreigners to invest in the real or
financial assets of the country. The distortion of incentives will reduce efficiency in resource allocation
and will reduce saving and investment, hence, will reduce the standard of living.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

233

~ANSWER:
Political instability interferes with the enforcement of property rights, hence, it reduces people's
incentives to save, invest, and start new businesses. It also reduces incentives for foreigners to invest in
the country. Lower saving and investment reduces productivity. Fewer new businesses mean fewer new
jobs and less technological progress.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

234

~ANSWER:
Most economists believe that poor nations are better off pursuing outward-oriented policies that promote
free trade. Countries that use their comparative advantage in trade are, in effect, helping themselves
through the gains from trade in the same way that nations that develop new technology raise their
standard of living. Hence, a country that eliminates trade restrictions will experience the same kind of
economic growth that would occur after a major technological advance. However, inward-oriented trade
policies are like a country choosing to restrict the use of superior technologies.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 24/Production and Growth 81

concentrated in agriculture, since World War II government has taken an active role in
sponsoring research in a wide variety of scientific and technical areas.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
241
. What does the productivity slowdown refer to? How has it affected the standard of living?
ANSWER: From 1959 to 1973 productivity grew 3.2 percent per year. From 1973 to 1998
productivity grew at 1.3 percent per year. As productivity growth slowed, so did the growth
of real wages and real income. Consequently, the standard of living has not increased as
rapidly.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

235

~ANSWER:
Countries like South Korea, Singapore and Taiwan that initiated outward-oriented policies have had high
growth rates. This likely is the result of gains from trade that allow these countries to produce what they
can produce comparatively cheap, and then trade these goods to get funds to buy goods they need from
countries that produce those goods relatively cheap.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

236

~ANSWER:
It is important to remember that income per person is closely tied to the standard of living. With greater
population, the amount of other inputs per worker falls. This decrease results in lower productivity, and
so lower output per worker. This is evident for example for human capital where a rapidly increasing
population burdens the educational system.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

237

~ANSWER:
Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of
bearing children would likely reduce population growth rates. In particular, women with the opportunity
to receive a good education and desirable employment tend to want to have fewer children than do those
with fewer opportunities outside the home. Hence, policies designed to increase educational and
employment opportunities for women will likely reduce population growth rates without coercion.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

238

~ANSWER:

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
82 Chapter 24/Production and Growth

242
. What is the productivity slowdown usually attributed to? Is it unique to the United States
and recent times?
ANSWER: The decrease in the growth rate of productivity is usually attributed to slow
technological progress. Other industrial countries also experienced a slowdown. Although
productivity growth slowed from its 1950–1973 rate, productivity growth remained high
relative to other periods in the last 125 years.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

Once a person discovers an idea, the idea enters society's pool of knowledge, which many other people
can use. It is difficult or impossible to exclude others from using your ideas, and so difficult or impossible
to collect payment from those who use your ideas.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

240

~ANSWER:
The two major ways government can encourage technological improvement are the patent system, which
conveys property rights to the holder of the patent for a given number of years, and through the support
of research and development activities in the economy. Both of these methods encourage innovation and
invention by providing a larger reward for successful technology, and by reducing the private cost of
developing technology. The US government has strong patent protection, and has supported research
and development for well over a century. Whereas, in the last century, government sponsored research
was concentrated in agriculture, since World War II government has taken an active role in sponsoring
research in a wide variety of scientific and technical areas.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

241

~ANSWER:
From 1959 to 1973 productivity grew 3.2 percent per year. From 1973 to 1998 productivity grew at 1.3
percent per year. As productivity growth slowed, so did the growth of real wages and real income.
Consequently, the standard of living has not increased as rapidly.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

242

~ANSWER:
The decrease in the growth rate of productivity is usually attributed to slow technological progress. Other
industrial countries also experienced a slowdown. Although productivity growth slowed from its 1950–
1973 rate, productivity growth remained high relative to other periods in the last 125 years.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 24/Production and Growth 83

243
. In general, African countries have had low or even negative real income per person growth
rates. What explains these low and negative growth rates?
ANSWER: The low growth has been attributed to legal and geographic trade barriers, high tax
rates, low saving rates, and political instability.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
244
. What might the African governments do to foster higher economic growth?
ANSWER: They could make, perhaps with outside support, better efforts to increase the peace
and thus encourage investment and saving. They could focus government spending on
essential things like public order, the judicial system, and basic health and education. By
focusing on these basic functions, they could decrease tax rates on production and trade.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

243

~ANSWER:
The low growth has been attributed to legal and geographic trade barriers, high tax rates, low saving
rates, and political instability.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

244

~ANSWER:
They could make, perhaps with outside support, better efforts to increase the peace and thus encourage
investment and saving. They could focus government spending on essential things like public order, the
judicial system, and basic health and education. By focusing on these basic functions, they could decrease
tax rates on production and trade.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

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