Chapter 25 Production and Growth

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1 Chapter 25 Production and Growth TRUE/FALSE 1. If per capita real income grows by 2 percent per year, then it will double in approximately 20 years. ANS: F DIF: 1 REF: Over the period , the United States experienced an average annual growth rate of real GDP per person of about 4 percent per year. ANS: F DIF: 1 REF: In 2006, income per person in the United States was about 12 times that in India. ANS: T DIF: 1 REF: Over the period , Brazil s rate of economic growth exceeded that of China. ANS: T DIF: 2 REF: If a country has a higher level of productivity than another, then it also has a higher level of real GDP. ANS: F DIF: 2 REF: 25-1 TOP: Productivity MSC: Analytical 6. International data on real GDP per person give us a sense of how standards of living vary across countries. ANS: T DIF: 1 REF: 25-1 TOP: Real GDP 7. Real GDP per person in rich countries, such as Germany, is sometimes more than 10 times that of poor countries like Pakistan. ANS: T DIF: 1 REF: 25-1 TOP: Standard of living 8. Both the standard of living and the growth of real GDP per person vary widely across countries. ANS: T DIF: 1 REF: 25-1 TOP: Standard of living Real GDP 9. If they could increase their growth rates slightly, countries with low income would catch up with rich countries in about ten years. ANS: F DIF: 1 REF: 25-1 TOP: Economic growth Catch-up effect 10. In the United States real GDP per person is about $44,000, while in some poor countries real GDP per person is less than $3,000. ANS: T DIF: 1 REF:

2 1684 Chapter 25 /Production and Growth 11. Although growth rates across countries vary some, rankings of countries by income remain pretty much the same over time. ANS: F DIF: 1 REF: International data on the history of real GDP growth rates shows that over the last 100 years or so, rich countries got richer and poor countries got poorer. ANS: F DIF: 1 REF: Productivity can be computed as number of hours worked divided by output. ANS: F DIF: 1 REF: 25-2 TOP: Productivity 14. Indonesians, for example, have a lower standard of living than Americans because they have a lower level of productivity. ANS: T DIF: 1 REF: 25-2 TOP: Productivity Standard of living 15. If Country A produces 6,000 units of goods and services using 600 hours of labor, and if Country B produces 5,000 units of goods and services using 450 units of labor, then productivity is higher in Country B than in Country A. ANS: T DIF: 2 REF: 25-2 TOP: Productivity 16. Like physical capital, human capital is a produced factor of production. ANS: T DIF: 2 REF: 25-2 TOP: Physical capital Human capital 17. Human capital is the term economists use to refer to the knowledge and skills that workers acquire through education, training, and experience. ANS: T DIF: 2 REF: 25-2 TOP: Human capital 18. A forest is an example of a nonrenewable resource. ANS: F DIF: 1 REF: 25-2 TOP: Natural resources 19. Historical trends in the prices of most natural resources compared to prices of other goods indicate that natural resources have become scarcer over time. ANS: F DIF: 2 REF: 25-2 TOP: Natural resources 20. It is possible for a country without a lot of domestic natural resources to have a high standard of living. ANS: T DIF: 1 REF: 25-2 TOP: Natural resources Standard of living

3 Chapter 25 /Production and Growth Constant returns to scale is the point on a production function where increasing inputs will no longer increase output. ANS: F DIF: 2 REF: 25-2 TOP: Constant returns to scale 22. As capital per worker rises, output per worker rises. However, the increase in output per worker from an addition to capital is smaller, the larger is the existing amount of capital per worker. ANS: T DIF: 1 REF: 25-3 TOP: Production function MSC: Analytical 23. An increase in the saving rate does not permanently increase the growth rate of real GDP per person. ANS: T DIF: 2 REF: 25-3 TOP: Saving rate 24. Other things the same, another unit of capital will increase output by more in a poor country than in a rich country. ANS: T DIF: 1 REF: 25-3 TOP: Productivity Diminishing returns 25. The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely ever to experience the economic growth rates of wealthier countries. ANS: F DIF: 2 REF: 25-3 TOP: Catch-up effect 26. Two countries with the same saving rates must have the same growth rate of real GDP per person. ANS: F DIF: 1 REF: 25-3 TOP: Saving rate Catch-up effect 27. When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more than does production in Russia (that is, Russian GDP). ANS: F DIF: 3 REF: 25-3 TOP: Foreign investment 28. If your company opens and operates a branch in a foreign country, you will be engaging in foreign direct investment. ANS: T DIF: 1 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment 29. Investment in human capital has opportunity costs, but investment in physical capital does not. ANS: F DIF: 1 REF: 25-3 TOP: Opportunity costs Human capital Physical capital 30. Incentives for parents to send their children to school, such as small monthly payments to parents if their children have regular attendance, appear to increase school attendance. ANS: T DIF: 1 REF: 25-3

4 1686 Chapter 25 /Production and Growth 31. A country that made its courts less corrupt and its government more stable would likely see its standard of living rise. ANS: T DIF: 1 REF: 25-3 TOP: Property rights 32. If a country made it easier for people to establish and prove the ownership of their property, real GDP per person would likely rise. ANS: T DIF: 1 REF: 25-3 TOP: Property rights 33. Economists generally believe that inward-oriented policies are more likely to foster growth than outward oriented policies. ANS: F DIF: 1 REF: 25-3 TOP: Trade policy 34. If a rich country reduced subsidies to domestic producers who produce goods for which poor countries have a comparative advantage, the standard of living in these poor countries would likely rise. ANS: T DIF: 1 REF: 25-3 TOP: Trade policy 35. One reason that governments may find it useful to sponsor universities and basic research is that to a large extent knowledge is generally a private good. ANS: F DIF: 1 REF: 25-3 TOP: Public goods 36. The population growth rate tends to be higher in developed countries than in developing countries. ANS: F DIF: 1 REF: 25-3 TOP: Population growth 37. In countries where women are discriminated against, policies that increase the likelihood of career success and educational opportunities for women are likely to decrease the birth rate. ANS: T DIF: 1 REF: 25-3 TOP: Population growth 38. Countries with high population growth rates tend to have lower levels of educational attainment. ANS: T DIF: 1 REF: 25-3 TOP: Population growth 39. Studies confirm that controlling for other variables such as the percentage of GDP devoted to investment, poor countries tend to grow at a faster rate than rich countries. ANS: T DIF: 1 REF: 25-3 TOP: Catch-up effect 40. An increase in capital increases productivity only if it is purchased and operated by domestic residents. ANS: F DIF: 1 REF: 25-3 TOP: Foreign investment

5 Chapter 25 /Production and Growth Other things the same, an economy s factors of production are likely to be used more effectively if there is an economywide respect for property rights. ANS: T DIF: 1 REF: 25-3 TOP: Property rights 42. Economist Michael Kremer found that world growth rates fell as population increased. ANS: F DIF: 1 REF: 25-3 TOP: Population growth SHORT ANSWER 1. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use these numbers to compute the percentage increase in real GDP per person from 1987 to Year Real GDP (2000 prices) Population 1987 $6,435,000 million 243 million 2005 $11,092,000 million million ANS: Real GDP per person in 1987 was $6,435,000/243= about $26,481. Income per person in 2005 was $11,092,000/296.6 = about $37,397. Income per person grew by (37,397-26,481)/26,481 = about 41.2 percent. DIF: 1 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Real GDP Economic growth 2. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and standard of living mean. Make a list of things that determine labor productivity. ANS: 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. 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. DIF: 2 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Productivity Standard of living 3. What is a production function? Write an equation for a typical production function, and explain what each of the terms represents. ANS: A production function is a mathematical representation of the relationship between the quantity of inputs used in production and the quantity of output produced using these inputs. 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. DIF: 2 REF: 25-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Production function

6 1688 Chapter 25 /Production and Growth 4. What is the difference between human capital and technology? ANS: 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 available 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 it. DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Human capital Technology 5. 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. ANS: 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. DIF: 3 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect MSC: Analytical 6. Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from However, during these same years South Korea had a 6 percent growth rate of average annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different? ANS: The explanation is based on the concept of diminishing returns to capital. A country that has a lot of income, and so a lot of capital, gains less by adding more capital than does a country that currently has little capital. It is easy to envision how a poor country without much capital could increase its output considerably with even a little more capital. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Investment Catch-up effect Diminishing returns MSC: Analytical 7. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity? ANS: 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. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity

7 8. Why does a nation s standard of living depend on property rights? Chapter 25 /Production and Growth 1689 ANS: 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 which in turn will reduce the standard of living. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Property rights 9. How do outward-oriented policies affect a nation's productivity? ANS: 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. Inward-oriented trade policies are akin to a country choosing to restrict the use of superior technologies. DIF: 1 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Economic growth 10. At first patents might seem like a deterrent to growth because in effect they restrict the use of new technology. Yet many economists believe that patents generate growth. Explain why. ANS: Once someone comes up with an idea it is often easy for others to take advantage of it so that the idea becomes part of a society s knowledge. So, knowledge is frequently a public good. Without patents an inventor s reward for research and development of a good idea would be smaller. So, patents increase the incentives for firms and individuals to engage in research. The negative consequences of temporarily restricting the use of new ideas with patents is outweighed by the increase in new ideas that patents induce. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Economic growth 11. Some economists argue that it is possible to raise the 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? ANS: 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. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Population growth Standard of living

8 1690 Chapter 25 /Production and Growth 12. Compare and contrast the population theories of Malthus and Kremer. ANS: The difference is that Malthus predicted that population growth would be greater than growth in the ability to increase output. He believed that people would continue to populate the earth until output reached a subsistence level. On the other hand Kremer argues that population growth increased productivity allowing people to improve their standard of living despite growing population. Kremer argues that with more population comes more innovations. The improvements in technology outweighed any adverse impact of the increase in population on the standard of living. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Population growth Economists Sec00 - Production and Growth MULTIPLE CHOICE 1. The average income in a rich country, such as the United States or Japan, is more than a. 3 times, but less than 5 times, the average income in a poor country, such as Indonesia or Nigeria. b. 5 times, but less than 10 times, the average income in a poor country, such as Indonesia or Nigeria. c. 10 times, but less than 20 times, the average income in a poor country, such as Indonesia or Nigeria. d. more than 20 times the average income in a poor country, such as Indonesia or Nigeria. ANS: C DIF: 1 REF: Over the past century in the United States, real GDP per person has grown, on average, by about a. 1 percent per year. b. 2 percent per year. c. 3 percent per year. d. 5 percent per year. ANS: B DIF: 1 REF: During the past century the average growth rate of U.S. real GDP per person implies that it doubled, on average, about every a. 100 years. b. 70 years. c. 35 years. d. 25 years. ANS: C DIF: 1 REF: In the United States, as measured by real GDP per person, average income is about how many times as high as average income a century ago? a. 2 b. 4 c. 6 d. 8 ANS: D DIF: 1 REF: 25-0

9 5. Over the last century, U.S. real GDP per person grew at a rate of about a. 2 percent per year, so that it is now 2 times as high as it was a century ago. b. 2 percent per year, so that it is now 8 times as high as it was a century ago. c. 4 percent per year, so that it is now 2 times as high as it was a century ago. d. 4 percent per year, so that it is now 8 times as high as it was a century ago. Chapter 25 /Production and Growth 1691 ANS: B DIF: 1 REF: Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If, in the next 100 years, it doubles every 25 years, then a century from now U.S. real GDP per person will be a. 4 times higher than it is now. b. 8 times higher than it is now. c. 12 times higher than it is now. d. 16 times higher than it is now. ANS: D DIF: 2 REF: Over the past century in the United States, average income as measured by real GDP per person has grown about a. 4 percent per year, which implies a doubling about every 18 years. b. 4 percent per year, which implies a doubling about every 8 years. c. 2 percent per year, which implies a doubling about every 35 years. d. 2 percent per year, which implies a doubling about every 18 years. ANS: C DIF: 2 REF: In which of the following countries has economic growth been sufficiently strong in recent history to propel that country from being among the poorest in the world to being among the richest in the world? a. India b. Mexico c. Nigeria d. Singapore ANS: D DIF: 1 REF: Average income has been stagnant for many years in a. Argentina. b. Singapore. c. Nigeria. ANS: C DIF: 1 REF: 25-1

10 1692 Chapter 25 /Production and Growth 10. Which of the following statements is correct? a. The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a good gauge of economic progress. b. The level of real GDP is a good gauge of economic progress, and the growth of real GDP is a good gauge of economic prosperity. c. The level of real GDP is a good gauge of economic prosperity, and the level of real GDP per person is a good gauge of economic progress. d. The level of real GDP is a good gauge of economic progress, and the level of real GDP per person is a good gauge of economic prosperity. ANS: A DIF: 2 REF: 25-0 Sec01 - Production and Growth - Economic Growth around the World MULTIPLE CHOICE 1. You are told that Country A experienced growth of real GDP per person of 4 percent per year throughout the 1900s. In view of other countries experience, you would have to characterize Country A s growth as a. exceptionally high. b. moderately high. c. moderately low. d. exceptionally low. ANS: A DIF: 1 REF: You are told that Country A experienced growth of real GDP per person of 0.5 percent per year throughout the 1900s. In view of other countries experience, you would have to characterize Country A s growth as a. exceptionally high. b. moderately high. c. moderately low. d. exceptionally low. ANS: D DIF: 1 REF: As of 2006, using real GDP per person as a measure, we would classify a. the United States and Mexico as advanced economies and Bangladesh as a middle-income country. b. Canada as an advanced economy, Mexico as a middle-income country, and Mali as a poor country. c. Japan and India as advanced economies and Mexico as a poor country. d. Japan as an advanced economy, the United Kingdom as a middle-income country, and Argentina as a poor country. ANS: B DIF: 2 REF: 25-1 TOP: Standard of living 4. Over the period , which of the following countries experienced the highest average annual growth rate of real GDP per person? a. Indonesia b. India c. Pakistan d. Brazil ANS: D DIF: 2 REF: 25-1

11 5. A nation's standard of living is best measured by its a. real GDP. b. real GDP per person. c. nominal GDP. d. nominal GDP per person. Chapter 25 /Production and Growth 1693 ANS: B DIF: 1 REF: 25-1 TOP: Standard of living 6. If one wants to know how the material well-being of the average person has changed over time in a given country, one should look at the a. level of real GDP. b. growth rate of nominal GDP. c. growth rate of real GDP. d. growth rate of real GDP per person. ANS: D DIF: 1 REF: 25-1 TOP: Standard of living 7. The level of real GDP person a. differs widely across countries, but the growth rate of real GDP per person is similar across countries. b. is very similar across countries, but the growth rate of real GDP per person differs widely across countries. c. and the growth rate of real GDP per person are similar across countries. d. and the growth rate of real GDP per person vary widely across countries. ANS: D DIF: 1 REF: Which of the following statements is correct? In 2006, a. real income per person in the U.S. was about 6 times that in China. b. real income per person in China was about 2 times that in India. c. the typical resident of India had less real income than the typical resident of England in ANS: D DIF: 2 REF: 25-1 TOP: Standard of living 9. Which of the following statements is correct? a. In 1870, real income per person was higher in the United Kingdom than in any other country at that time. b. Between 1870 and 2006, India experienced significantly stronger growth of real income per person than did the United States. c. Between 1870 and 2006, the United States experienced significantly stronger growth of real income per person than did Canada. ANS: A DIF: 2 REF: 25-1 TOP: Standard of living 10. In 2006, real GDP per person in Bangladesh was a. about 3 times as high as it was in the U.S. in b. about twice as high as it was in the U.S. in c. about the same as it was in the U.S. in d. less than it was in the U.S. in ANS: D DIF: 2 REF: 25-1 TOP: Standard of living

12 1694 Chapter 25 /Production and Growth 11. In 2006, the typical Bangladeshi had about a. 1/5 the real income of a typical American a century ago. b. 2/3 the real income of a typical American a century ago. c. 2 times as much real income as that of a typical American a century ago. d. 4 times as much real income as that of a typical American a century ago. ANS: B DIF: 1 REF: 25-1 TOP: Standard of living 12. Which of the following countries had the highest growth rate over the last 100 or so years? a. Brazil b. Germany c. Canada d. United States ANS: A DIF: 2 REF: In recent decades, average income in some East Asian countries, such as South Korea, Singapore, and Taiwan, has risen about a. 2 percent per year. b. 4 percent per year. c. 7 percent per year. d. 10 percent per year. ANS: C DIF: 1 REF: In some East Asian countries, average income, as measured by real GDP per person, has recently grown at an average annual rate that implies output will double about every a. 10 years. b. 15 years. c. 20 years. d. 25 years. ANS: A DIF: 2 REF: Countries that grew the fastest over the last 100 or so years had growth rates of real income per person of about a. 0.5 percent per year. b. 1.5 percent per year. c. 2.0 percent per year. d. 2.5 percent per year. ANS: D DIF: 1 REF: Of the following countries, which grew most slowly, in terms of real GDP per person, over the last 100 years? a. Brazil b. Mexico c. China d. United States ANS: D DIF: 2 REF: 25-1

13 Chapter 25 /Production and Growth 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. India d. South Korea ANS: D DIF: 1 REF: Average income has been stagnant for many years in a. Ireland. b. Singapore. c. Ethiopia. ANS: C DIF: 1 REF: Which list contains, in this order, a country whose real GDP per person grew faster and one whose real GDP per person grew slower than real GDP per person in the U.S. over the last 100 years? a. China, Pakistan b. United Kingdom, China c. Pakistan, Argentina d. Argentina, Japan ANS: A DIF: 2 REF: Countries that have lower levels of real GDP per person than the United States a. tend to have growth rates that are higher than that of the United States. b. tend to have growth rates that are about the same as that of the United States. c. tend to have growth rates that are lower than that of the United States. d. in some cases have growth rates that are higher than that of the United States and in other cases lower than that of the United States. ANS: D DIF: 2 REF: Which of the following is correct? a. Over the last 100 years Japan had a higher average growth rate than the United States. It follows that, today, the standard of living in Japan is higher than in the United States. b. The typical person in Bangladesh today has about twice the real income of a typical American 100 years ago. c. The typical citizen of China today has about one-half as much real income as the typical citizen of America today. d. None of the above is correct. ANS: D DIF: 2 REF: Which of the following does the level of real GDP measure? a. total real income b. productivity c. the standard of living ANS: A DIF: 2 REF: 25-1 TOP: Real GDP

14 1696 Chapter 25 /Production and Growth 23. Which of the following is correct? a. Countries with the highest growth rates over the last 100 years are the ones that had the highest level of real GDP 100 years ago. b. Most countries have had little fluctuation around their average growth rates during the past 100 years. c. The ranking of countries by income changes substantially over time. d. Over the last 100 years, Japan had the highest real GDP growth rate, and now has the highest real GDP per person. ANS: C DIF: 2 REF: Over the last 100 years which of the following had growth rates higher than that of the United States? a. the United Kingdom b. Bangladesh c. Brazil d. None of the above is correct. ANS: C DIF: 2 REF: Which of the following nations experienced average rates of economic growth of less than 2 percent over the last 100 years? a. Bangladesh b. Pakistan c. United Kingdom ANS: D DIF: 2 REF: In 1870, the richest country in the world was a. the United States. b. Spain. c. the United Kingdom. d. Germany. ANS: C DIF: 1 REF: Which of the following countries had the highest level of real GDP per person in 2006? a. Germany b. United Kingdom c. United States d. Japan ANS: C DIF: 1 REF: 25-1 TOP: Standard of living 28. Which of the following countries had the lowest level of real GDP per person in 2006? a. Pakistan b. Indonesia c. Mexico d. China ANS: A DIF: 1 REF: 25-1 TOP: Standard of living

15 Chapter 25 /Production and Growth Which of the following pairs of countries experienced approximately the same rate of growth of real income per person over the last 100 or so years? a. Germany and Japan b. Indonesia and the United Kingdom c. the United States and Japan d. Mexico and Pakistan ANS: B DIF: 2 REF: Last year real GDP per person in the imaginary nation of Olympus was 4,500. The year before it was 4,250. By about what percentage did Olympian real GDP per person grow during the period? a. 4.6 percent b. 5.2 percent c. 5.9 percent d. 6.5 percent ANS: C DIF: 2 REF: Last year real GDP in the imaginary nation of Oceania was billion and the population was 2.2 million. The year before, real GDP was billion and the population was 2.0 million. What was the growth rate of real GDP per person during the year? a. 12 percent b. 10 percent c. 4 percent d. 2 percent ANS: D DIF: 2 REF: In 2006 real GDP in the imaginary nation of Populia was 750 billion and the population was 3 million. In 2007 real GDP was billion and the population was 3.3 million. What was the growth rate of real GDP per person during the year? a. 10 percent b. 14 percent c. 17 percent d. 21 percent ANS: A DIF: 2 REF: In 2007, the imaginary nation of Freedonia had a population of 2,700 and real GDP of 16,200,000. In 2008 it had a population of 2,500 and real GDP of 14,640,000. What was the growth rate of real GDP per person in Freedonia between 2007 and 2008? a percent b percent c. 4.4 percent d. 5.2 percent ANS: A DIF: 2 REF: 25-1

16 1698 Chapter 25 /Production and Growth 34. In 2006, the imaginary nation of Viloxia had a population of 5,000 and real GDP of 500,000. In 2007 it had a population of 5,100 and real GDP of 520,200. Over the year in question, real GDP per person in Viloxia grew by a. 2 percent, which is high compared to average U.S. growth over the last one-hundred years. b. 2 percent, which is about the same as average U.S. growth over the last one-hundred years. c. 4 percent, which is high compared to average U.S. growth over the last one-hundred years. d. 4 percent, which is about the same as average U.S. growth over the last one-hundred years. ANS: B DIF: 3 REF: Last year Panglossia had real GDP of 27.0 billion. This year it had real GDP of 31.5 billion. Which of the following changes in population is consistent with a 5 percent growth rate of real GDP per person over the last year? a. The population decreased from 88 million to 84 million. b. The population decreased from 75 million to 73 million. c. The population increased from 45 million to 50 million. d. The population increased from 60 million to 62 million. ANS: C DIF: 3 REF: 25-1 MSC: Analytical 36. Which of the following is indicated by the data on real income per person for various countries over the past 100 or so years? a. If, in a relatively poor country, real income per person had grown by 3.5 percent per year for the last 100 years, it would be a relatively rich country today. b. Rich countries became richer and poor countries became poorer. c. In the United States, real income per person today is about four times as high as it was 100 years ago. ANS: A DIF: 2 REF: Which of the following is not correct? a. Across countries there are large differences in the average income per person. These differences are reflected in large differences in the quality of life. b. With a growth rate of about 2 percent per year, average income per person doubles about every 35 years. c. The ranking of countries by average income changes very little over time. d. In some countries real income per person has changed very little over many years. ANS: C DIF: 2 REF: 25-1 TOP: Income Economic growth Sec02 - Production and Growth - Productivity: Its Role and Determinants MULTIPLE CHOICE 1. The one variable that stands out as the most significant explanation of large variations in living standards around the world is a. productivity. b. population. c. preferences. d. prices. ANS: A DIF: 1 REF: 25-2 TOP: Productivity Standard of living

17 2. In determining living standards, productivity plays a key role a. for individuals, but not for nations. b. for nations, but not for individuals. c. for both nations and individuals. d. for neither nations nor individuals. ANS: C DIF: 1 REF: 25-2 TOP: Standard of living Productivity 3. The quantity of goods and services produced from each unit of labor input is called a. standard of living. b. productivity. c. capitalized quantity. d. the knowledge base. ANS: B DIF: 1 REF: 25-2 TOP: Productivity Chapter 25 /Production and Growth Productivity is defined as a. the amount of difficulty that is involved in producing a given quantity of goods and services. b. the quantity of labor that is required to produce one unit of goods and services. c. the quantity of goods and services produced from each unit of labor input. d. the quantity of goods and services produced over a given amount of time. ANS: C DIF: 1 REF: 25-2 TOP: Productivity 5. Which of the following is correct? a. Although levels of real GDP per person vary substantially from country to country, the growth rate of real GDP per person is similar across countries. b. Productivity is not closely linked to government policies. c. The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a good gauge of economic progress. d. Productivity may be measured by the growth rate of real GDP per person. ANS: C DIF: 2 REF: Perry accumulated a lot of mathematical skills while in high school, college, and graduate school. Economists include these skills as part of Perry s a. standard of learning. b. technological knowledge. c. physical capital. d. human capital. ANS: D DIF: 2 REF: 25-2 TOP: Human capital 7. What term do economists use to describe the relationship between the quantity of inputs used and the quantity of output produced? a. production function b. input function c. capital function d. returns to scale ANS: A DIF: 1 REF: 25-2 TOP: Production function

18 1700 Chapter 25 /Production and Growth 8. Which of the following items plays a role in determining productivity? a. physical capital b. natural resources c. technological knowledge ANS: D DIF: 1 REF: 25-2 TOP: Productivity 9. Technological knowledge a. is the same thing as human capital. b. can be discovered but it can never be kept secret. c. is a determinant of productivity. d. does not play a role in the relationship that economists call the production function. ANS: C DIF: 2 REF: 25-2 TOP: Technology 10. Industrial machinery is an example of a. a factor of production that in the past was an output from the production process. b. technological knowledge. c. a production function. d. an item which always has the property called constant returns to scale. ANS: A DIF: 2 REF: 25-2 TOP: Physical capital 11. Industrial machinery is an example of a. a factor of production that in the past was an output from the production process. b. physical capital. c. something that influences productivity. ANS: D DIF: 2 REF: 25-2 TOP: Physical capital Productivity 12. Which of the following statements about inputs is correct? a. A forest is an example of a natural resource; it is also an example of a renewable resource. b. There is no distinction between human capital and technological knowledge. c. Human capital is a non-produced factor of production. d. Physical capital is a non-produced factor of production. ANS: A DIF: 2 REF: 25-2 TOP: Inputs 13. Despite its status as one of the richest countries in the world, Japan a. has a very low level of productivity. b. has few natural resources. c. has very little human capital. d. engages in a relatively small amount of international trade. ANS: B DIF: 2 REF: 25-2 TOP: Natural resources

19 Chapter 25 /Production and Growth The notion that our ability to conserve natural resources is growing more rapidly than their supplies are dwindling is supported by the fact that a. most economists do not regard the availability of natural resources as a determinant of productivity. b. the quantity of natural resources does not enter into any production function. c. inflation-adjusted prices of natural resources are stable or falling over time. d. inflation-adjusted prices of natural resources are rising over time. ANS: C DIF: 2 REF: 25-2 TOP: Natural resources 15. Which of the following statements is correct? a. By definition, all natural resources are nonrenewable. b. Market prices give us reason to believe that natural resources are a limit to economic growth. c. An economy must be blessed with ample quantities of natural resources if it is to be a highly productive economy. d. Differences in natural resources can explain some of the differences in standards of living around the world. ANS: D DIF: 2 REF: 25-2 TOP: Natural resources 16. The average amount of goods and services produced from each hour of a worker's time is called a. GDP. b. per capita GDP. c. productivity. d. technological knowledge. ANS: C DIF: 1 REF: 25-2 TOP: Productivity 17. For a given year, productivity in a particular country is most closely matched with that country's a. level of real GDP over that year. b. level of real GDP divided by hours worked over that year. c. growth rate of real GDP divided by hours worked over that year. d. growth rate of real GDP per person over that year. ANS: B DIF: 2 REF: 25-2 TOP: Productivity Real GDP 18. Productivity a. is nearly the same across countries, and so provides no help explaining differences in the standard of living across countries. b. explains very little of the differences in the standard of living across countries. c. explains some, but not most of the differences in the standard of living across countries. d. explains most of the differences in the standard of living across countries. ANS: D DIF: 2 REF: 25-2 TOP: Productivity 19. Which of the following is a correct way to measure productivity? a. Divide the number of hours worked by the quantity of output. b. Divide the quantity of output by the number of hours worked. c. Divide the quantity of output by the quantity of physical capital. d. Divide the change in the quantity of output by the change in the number of hours worked. ANS: B DIF: 1 REF: 25-2 TOP: Productivity

20 1702 Chapter 25 /Production and Growth 20. Cedar Valley Furniture uses 5 workers, each working 8 hours, to produce 80 rocking chairs. What is the productivity of these workers? a. 2 chairs per hour b. 10 chairs per hour c. 1 hour per chair d. 80 chairs ANS: A DIF: 1 REF: 25-2 TOP: Productivity 21. In one day Alpha Cabinet Company made 40 cabinets with 320 hours of labor. What was their productivity? a. 1/8 cabinet per hour b. 8 hours per cabinet c. 40 cabinets d. None of the above is correct. ANS: A DIF: 2 REF: 25-2 TOP: Productivity 22. You and your friend work together for 4 hours to produce a total of 12 futons. What is productivity? a. 12 futons b. 24 futons c. 3 futons per hour of labor d. 1.5 futons per hour of labor ANS: D DIF: 2 REF: 25-2 TOP: Productivity 23. A barber shop produces 96 haircuts a day. Each barber in the shop works 8 hours per day and produces the same number of haircuts per hour. If the shop s productivity is 3 haircuts per hour of labor, then how many barbers does the shop employ? a. 2 b. 3 c. 4 d. 6 ANS: C DIF: 2 REF: 25-2 TOP: Productivity 24. Nathan owns a bakery that bakes only cakes. All of his bakers work 8 hours per day. In 2006, he employed 5 bakers and they produced 200 cakes each day. In 2007, he employed 6 bakers and they produced 249 cakes each day. In Nathan s bakery, productivity a. decreased by 2.33 percent between 2006 and b. increased by 2.33 percent between 2006 and c. increased by 3.75 percent between 2006 and d. increased by percent between 2006 and ANS: C DIF: 2 REF: 25-2 TOP: Productivity

21 Chapter 25 /Production and Growth In 2007, Modern Electronics, Inc. produced 60,000 calculators, employing 80 workers, each of whom worked 8 hours per day. In 2008, the same firm produced 76,500 calculators, employing 85 workers, each of whom worked 10 hours per day. Between 2007 and 2008, productivity at Modern Electronics a. decreased by 4.00 percent. b. remained constant. c. increased by 8.33 percent. d. increased by percent. ANS: A DIF: 3 REF: 25-2 TOP: Productivity 26. Consider two countries. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000, of whom 1,800 work 6 hours a day to make 270,000 final goods. a. Country A has higher productivity and higher real GDP per person than country B. b. Country A has lower productivity and lower real GDP per person than country B. c. Country A has higher productivity, but lower real GDP per person than country B. d. Country B has lower productivity, but higher real GDP per person than country B. ANS: B DIF: 2 REF: 25-2 TOP: Productivity Real GDP 27. Workland has a population of 10,000, of whom 7,000 work 8 hours a day to produce a total of 224,000 final goods. Laborland has a population of 5,000, of whom 4,000 work 12 hours a day to produce a total of 120,000 final goods. a. Workland has higher productivity and higher real GDP per person than Laborland. b. Workland has higher productivity but lower real GDP per person than Laborland. c. Workland has lower productivity but higher real GDP per person than Laborland. d. Workland has lower productivity and lower real GDP per person than Laborland. ANS: B DIF: 3 REF: 25-2 TOP: Productivity Real GDP 28. Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours a day and had productivity of 3.0. The country with the higher real GDP was a. country A, and the country with higher real GDP per person was country A. b. country A, and the country with higher real GDP per person was country B. c. country B, and the country with higher real GDP per person was country A. d. country B, and the country with higher real GDP per person was country B. ANS: B DIF: 3 REF: 25-2 TOP: Productivity Real GDP MSC: Analytical 29. Last year a country had 800 workers who worked an average of 8 hours and produced 12,800 units. This year the country had 1000 workers who worked an average of 8 hours and produced 14,000 units. This country s productivity was a. higher this year than last year. A possible source of this change in productivity is a change in the size of the capital stock. b. higher this year than last year. A change in the size of the capital stock does not affect productivity. c. lower this year than last year. A possible source of this change in productivity is a change in the size of the capital stock. d. lower this year than last year. A change in the size of the capital stock does not affect productivity. ANS: C DIF: 3 REF: 25-2 TOP: Productivity

22 1704 Chapter 25 /Production and Growth 30. Which of the following statements is true? a. Productivity is calculated as hours worked divided by output produced. b. Americans have a higher standard of living than Indonesians because American workers are more productive than Indonesian workers. c. Trends in the market prices of most resources indicate that they have become increasingly scarce over time. ANS: B DIF: 2 REF: 25-2 TOP: Productivity 31. Which of the following is not correct? a. Countries that have had higher output growth per person have typically done so without higher productivity growth. b. A country's standard of living and its productivity are closely related. c. Productivity refers to output produced per hour of work. d. Increases in productivity can be used to increase output or leisure. ANS: A DIF: 1 REF: 25-2 TOP: Productivity 32. Productivity is the a. key determinant of living standards, and growth in productivity is the key determinant of growth in living standards. b. key determinant of living standards, but growth in productivity is not the key determinant of growth in living standards. c. not the key determinant of living standards, but growth in productivity is the key determinant of growth in living standards. d. not the key determinant of living standards, and growth in productivity is not the key determinant of growth in living standards. ANS: A DIF: 1 REF: 25-2 TOP: Productivity Standard of living 33. Both Tom and Jerry work 10 hours a day. Tom can produce six baskets of goods per hour while Jerry can produce 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. ANS: D DIF: 1 REF: 25-2 TOP: Productivity Standard of living 34. Waldo works eight hours and produces 7 units of goods per hour. Emerson works six hours and produces 10 units of goods per hour. a. Waldo s productivity and output are greater than Emerson s. b. Waldo s productivity is greater than Emerson s but his output is less. c. Emerson s productivity and output are greater than Waldo s. d. Emerson s productivity is greater than Waldo s but his output is less. ANS: C DIF: 2 REF: 25-2 TOP: Productivity

23 Chapter 25 /Production and Growth In 8 hours, Sonja produces 8 units of goods and services. In 10 hours, Emma produces 9 units of goods and services. It follows that a. Sonja s productivity is higher than Emma s. b. Emma s productivity is higher than Sonja s. c. Emma s income per hour will be higher than Sonja s. d. Sonja s income per day will be higher than Emma s. ANS: A DIF: 2 REF: 25-2 TOP: Productivity 36. Mary looks over reports on four of her workers. Jack made 25 baskets in 5 hours. Walter made 36 baskets in 6 hours. Rudy made 40 baskets in 10 hours. Sam made 22 baskets in four hours. Who has the greatest productivity? a. Jack b. Walter c. Rudy d. Sam ANS: B DIF: 1 REF: 25-2 TOP: Productivity 37. Real Foods produced 400,000 cans of diced tomatoes in 2007 and 460,000 cans of diced tomatoes in They employed the same number of labor hours each year. Relative to their productivity in 2007, their productivity in 2008 was a. 6 percent lower. b. unchanged. c. 6 percent higher. d. 15 percent higher. ANS: D DIF: 2 REF: 25-2 TOP: Productivity 38. In 2007, Angel Foods produced 300,000 bags of tortilla chips, employing 12,000 hours of labor. In 2008, Angel Foods produced 325,000 bags of tortilla chips, employing 13,000 hours of labor. Relative to their productivity in 2007, their productivity in 2008 a. decreased by 2.1 percent. b. was unchanged. c. increased by 1.3 percent. d. increased by 2.3 percent. ANS: B DIF: 2 REF: 25-2 TOP: Productivity 39. Dilbert s Incorporated produced 5,000,000 units of accounting software in At the start of 2005 the pointy-haired boss reduced total annual hours of employment from 10,000 to 8,000 and production was 4,800,000. These numbers indicate that productivity a. fell by 4%. b. fell by 20%. c. rose by 12%. d. rose by 20%. ANS: D DIF: 2 REF: 25-2 TOP: Productivity

24 1706 Chapter 25 /Production and Growth 40. Dilbert s Incorporated produced 6,000,000 units of software in At the start of 2006 the pointy-haired boss raised employment from 10,000 total annual hours to 14,000 annual hours and production was 7,000,000 units. Based on these numbers what happened to productivity? a. It fell by about 16.7%. b. It stayed the same. c. It rose by about 16.7%. d. It rose by about 40%. ANS: A DIF: 2 REF: 25-2 TOP: Productivity 41. The key determinant of a the standard of living in a country is a. the amount of goods and services produced from each hour of a worker's time. b. the total amount of goods and services produced within the country. c. the total amount of its physical capital. d. its growth rate of real GDP. ANS: A DIF: 1 REF: 25-2 TOP: Standard of living Productivity 42. Which of the following is a determinant of productivity? a. human capital per worker b. physical capital per worker c. natural resources per worker ANS: D DIF: 1 REF: 25-2 TOP: Productivity 43. The inputs used to produce goods and services are also called a. productivity indicators. b. capitalization producers. c. production functions. d. factors of production. ANS: D DIF: 1 REF: 25-2 TOP: Factors of production 44. The Peapod Restaurant uses all of the following to produce vegetarian meals. Which of them is an example of physical capital? a. the owner's knowledge of how to prepare vegetarian entrees b. the money in the owner's account at the bank from which she borrowed money c. the tables and chairs in the restaurant d. the land the restaurant was built on ANS: C DIF: 1 REF: 25-2 TOP: Physical capital 45. The equipment and structures available to produce goods and services are called a. physical capital. b. human capital. c. the production function. d. technology. ANS: A DIF: 1 REF: 25-2 TOP: Physical capital

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