Chapter 25 Production and Growth

Transcription

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

25 Chapter 25 /Production and Growth The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce furniture are called a. human capital. b. physical capital. c. natural resources. d. technological knowledge. ANS: B DIF: 1 REF: 25-2 TOP: Physical capital 47. Which of the following would not be considered physical capital? a. a new factory building b. a computer used to help Mercury Delivery Service keep track of its orders c. on-the-job training d. a desk used in an accountant's office ANS: C DIF: 1 REF: 25-2 TOP: Physical capital 48. Which of the following is physical capital? a. the strength of workers b. the knowledge of workers c. financial assets like cash and bonds d. the equipment in a factory ANS: D DIF: 1 REF: 25-2 TOP: Physical capital 49. Which of the following would be considered physical capital? a. the refrigerators at Uncle Bob s restaurant b. rivers on which goods are transported c. the skills and knowledge of a lawyer ANS: A DIF: 1 REF: 25-2 TOP: Physical capital 50. Which of the following terms do we use to mean the same thing as physical capital? a. assembly line b. manual labor c. capital d. factor of production ANS: C DIF: 1 REF: 25-2 TOP: Physical capital 51. Human capital is the a. knowledge and skills that workers acquire through education, training, and experience. b. stock of equipment and structures that is used to produce goods and services. c. total number of hours worked in an economy. d. same thing as technological knowledge. ANS: A DIF: 1 REF: 25-2 TOP: Human capital

26 1708 Chapter 25 /Production and Growth 52. Which of the following is considered human capital? a. knowledge acquired from early childhood education programs b. knowledge acquired from grade school c. knowledge acquired from on-the-job training ANS: D DIF: 1 REF: 25-2 TOP: Human capital 53. Which of the following is human capital? a. a student loan b. understanding how to use a company's accounting software c. training videos for new corporate employees ANS: B DIF: 2 REF: 25-2 TOP: Human capital 54. Which of the following is considered human capital? a. the comfortable chair in your dorm room where you read economics texts b. the amount you get paid each week to work at the library c. the things you have learned this semester d. any capital goods that require a human to be present to operate ANS: C DIF: 1 REF: 25-2 TOP: Human capital 55. Which of the following best illustrates the human capital of a survivor stranded on an island? a. the fishing poles she has produced b. the invention of a better fishing lure c. the fresh fruit and fish on and around the island d. her previous training in a survival course ANS: D DIF: 1 REF: 25-2 TOP: Human capital 56. Which of the following is a part of your economics professor's human capital? a. the things she learned at some prestigious university b. her copy of Mankiw's text c. her chalk holder ANS: A DIF: 1 REF: 25-2 TOP: Human capital 57. Which of the following is human capital? a. textbooks b. hand held power tools c. understanding how to repair cars ANS: C DIF: 1 REF: 25-2 TOP: Human capital

27 Chapter 25 /Production and Growth Which of the following would be human capital and physical capital, respectively? a. for an accounting firm, the accountants knowledge of tax laws and computer software b. for a grocery store, grocery carts and shelving c. for a school, chalkboard and desks d. for a library, the building and the reference librarians knowledge of the Internet ANS: A DIF: 1 REF: 25-2 TOP: Human capital Physical capital 59. Which of the following would be human capital and physical capital, respectively? a. for an accounting firm, the accountants knowledge of tax laws and the number of hours worked by those accountants b. for a grocery store, grocery carts and cash registers. c. for a restaurant, the chefs knowledge about preparing food and equipment in the kitchen d. for a library, the building and the reference librarians knowledge of the Internet ANS: C DIF: 1 REF: 25-2 TOP: Human capital Physical capital 60. 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. ANS: D DIF: 1 REF: 25-2 TOP: Natural resources 61. The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called a. physical capital. b. natural resources. c. human capital. d. technological knowledge. ANS: B DIF: 1 REF: 25-2 TOP: Natural resources 62. Which of the following lists contains, in this order, natural resources, human capital, and physical capital? a. For a restaurant: the land the restaurant was built on, the things the Chef learned at Cooking School, the freezers where the chops and steaks are kept. b. For a furniture company: wood, the company cafeteria, saws. c. For a railroad: fuel, railroad engines, railroad tracks. d. None of the above is correct. ANS: A DIF: 1 REF: 25-2 TOP: Natural resources Physical capital Human capital 63. Which of the following is an example of a nonrenewable resource? a. coal b. honey c. livestock ANS: A DIF: 1 REF: 25-2 TOP: Natural resources

28 1710 Chapter 25 /Production and Growth 64. Which of the following is an example of a renewable natural resource? a. the knowledge possessed by scientists b. carpenters labor services c. lumber ANS: C DIF: 1 REF: 25-2 TOP: Natural resources 65. Which of the following is an example of a renewable natural resource? a. fish b. soybeans c. wood ANS: D DIF: 1 REF: 25-2 TOP: Natural resources 66. In a market economy, scarcity of resources is most clearly reflected in a. supply. b. demand. c. market prices. d. the stock of the resource. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity 67. In a market economy, we know that a resource has become scarcer when a. its price rises relative to other prices. b. it is non-renewable and some of it is used. c. people search for substitutes. ANS: A DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity 68. In a market economy, we know that a resource has become scarcer when a. both the demand for the good and the supply of the good have increased. b. both the demand for the good and the supply of the good have decreased. c. the demand for the good has increased and the supply has decreased. d. the demand for the good has decreased and the supply has remained constant. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity 69. If the price of a good has risen over time, a. it must have become more scarce. b. it must have become less scarce. c. it has become more scarce only if the price adjusted for inflation has risen. d. it has become less scarce only if the price adjusted for inflation has risen. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity

29 70. In a market economy, the real, or inflation-adjusted, price of a resource measures its a. contribution to revenue. b. relative scarcity. c. productivity. d. contribution to efficiency. ANS: B DIF: 1 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources Chapter 25 /Production and Growth Greater scarcity of a natural resource is indicated a. by an increase in the price of the resource, whether the price increase is less than or greater than the rate of inflation. b. only by an increase in the price of the resource that is less than the rate of inflation. c. only by an increase in the price of the resource that is greater than the rate of inflation. d. only by an increase in the price of the resource that is caused by a decrease in supply and is greater than the rate of inflation. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources 72. Historically, the market prices of most natural resources (adjusted for inflation) have a. increased. b. remained stable. c. remained stable or decreased. d. decreased. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources 73. The behavior of market prices over time indicates 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 the major determinant of productivity. ANS: C DIF: 1 REF: 25-2 TOP: Natural resources Economic growth 74. Which of the following statements is true? a. Natural resources per worker influence productivity only when those natural resources are renewable. b. The prices of most natural resources are stable or falling relative to other prices. c. Technology requires greater use of natural resources. d. The terms human capital and technological knowledge are used interchangeably. ANS: B DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources 75. Which of the following statements is true? a. The quantity of natural resources per worker can influence productivity. b. Technological knowledge and human capital are closely related. c. Over long periods of time, the prices of most natural resources are stable or falling, relative to other prices. ANS: D DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources Productivity

30 1712 Chapter 25 /Production and Growth 76. If natural resources had become scarcer, then we would expect their a. prices to have risen more than inflation as they have. b. prices to have risen more than inflation, but they have not. c. known quantities to have fallen as they have. d. known quantities to have fallen but they have not. ANS: B DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources 77. If an inexpensive alternative to oil were found, the price of oil adjusted for inflation a. would decline as the alternative would reduce the demand for oil. b. would decline as the alternative would reduce the supply of oil. c. would increase as the alternative would increase the demand for oil. d. would increase as the alternative would increase the supply of oil. ANS: A DIF: 3 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources 78. A leading environmental group recently published a report contending that humans are running a "resource deficit" because we are using natural resources faster than they can be regenerated. The group claims that this means that economic growth will eventually stop, and will even be reversed. An economist would a. agree with the report, and would point to rising natural resource prices as evidence. b. agree with the report, but wouldn't think it was important because growth will not slow down for several centuries. c. disagree with the report, in part because it ignores the mitigating effects of technological change. d. disagree with the report because labor and capital are the primary determinants of growth, and since they are plentiful, growth will not slow down. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources 79. If a good has become more scarce, then we know for sure that a. the demand for it increased. b. the supply of it decreased. c. either the demand for it increased or the supply of it decreased. d. both the supply of it and the demand for it decreased. ANS: C DIF: 3 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity 80. Which of the following best states economists' understanding of the facts concerning the relationship between natural resources and economic growth? a. A country with no or few domestic natural resources is destined to be poor. b. Differences in natural resources have virtually no role in explaining differences in standards of living. c. Some countries can be rich mostly because of their natural resources and countries without natural resources need not be poor, but can never have very high standards of living. d. Abundant domestic natural resources may help make a country rich, but even countries with few natural resources can have high standards of living. ANS: D DIF: 2 REF: 25-2 TOP: Natural resources Economic growth

31 Chapter 25 /Production and Growth In the country of Suchnott, the price of silver increased from $30 per ounce to $32 per ounce during a time when the overall price level increased by 5 percent. During this period, the real price of silver a. increased. b. decreased. c. stayed the same. d. might have increased, decreased or stayed the same; more information is needed to be sure. ANS: A DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Prices 82. Suppose over the last year that the price of recycled aluminum increased from $800 a ton to $900 a ton. Over the same time a measure of the overall price level increased from 120 to 130. The price of recycled aluminum increased by a. less than inflation, but this doesn t necessarily mean it became scarcer. b. less than inflation, and this means it became scarcer. c. more than inflation, and this means it became scarcer. d. more than inflation, but this doesn t necessarily mean that it become scarcer. ANS: C DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Prices Scarcity 83. Suppose over the last year that the price of iron ore increased from $1,200 a ton to $1,300 a ton. Over the same time a measure of the overall price level increased from 168 to 187. The price of iron ore increased by a. less than inflation, and this means it became relatively less scarce. b. less than inflation, and this means it became scarcer. c. more than inflation, and this means it became scarcer. d. more than inflation, but this doesn t necessarily mean that it become scarcer. ANS: A DIF: 2 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Prices Scarcity 84. After adjusting for inflation, over time the prices of most natural resources have been a. steady or falling, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling. b. steady or falling, meaning that their supplies are dwindling more rapidly than our ability to conserve them is growing. c. rising, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling. d. rising, meaning that their supplies are dwindling more rapidly than our ability to conserve them is growing. ANS: A DIF: 1 REF: 25-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Natural resources Prices 85. Proprietary technology is knowledge that is a. known but no longer used much. b. known, but only recently discovered. c. known mostly by only those in a certain profession. d. known only by the company that discovered it. ANS: D DIF: 1 REF: 25-2 TOP: Technology

32 1714 Chapter 25 /Production and Growth 86. Proprietary technology is technology that is a. widely used because it is easy to learn. b. widely used because the government subsidizes its use. c. not widely used because people could, but have not, taken the time to learn how to apply it. d. not widely used because it is known or controlled only by the company that discovered it. ANS: D DIF: 1 REF: 25-2 TOP: Technology 87. A management professor discovers a way for corporate management to operate more efficiently. He publishes his findings in a journal. His findings are a. proprietary and common knowledge. b. neither proprietary nor common knowledge. c. proprietary, but not common, knowledge. d. common, but not proprietary, knowledge. ANS: D DIF: 1 REF: 25-2 TOP: Technology 88. 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. common technological knowledge. b. common, but not technological, knowledge. c. proprietary technological knowledge. d. proprietary, but not technological, knowledge. ANS: C DIF: 1 REF: 25-2 TOP: Technology 89. Technological knowledge refers to a. human capital. 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. ANS: B DIF: 2 REF: 25-2 TOP: Technology 90. Thomas Edison received patents on many of his inventions. While the patents existed, his ideas were a. public goods and proprietary knowledge. b. public goods but not proprietary knowledge. c. private goods and proprietary knowledge. d. private goods but not proprietary knowledge. ANS: C DIF: 2 REF: 25-2 TOP: Technology 91. 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. technological knowledge. c. the production function. d. human capital. ANS: C DIF: 1 REF: 25-2 TOP: Production function

33 92. An understanding of the best ways to produce goods and services is called a. human capital. b. physical capital. c. technology. d. productivity. ANS: C DIF: 1 REF: 25-2 TOP: Technology Chapter 25 /Production and Growth Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the population of both countries was unchanged. a. It follows that real GDP per person must be higher in Oceania than in Freedonia. b. It follows that real GDP per person grew faster in Oceania than in Freedonia. c. It follows that the standard of living must be higher in Oceania than in Freedonia. ANS: B DIF: 2 REF: 25-2 TOP: Productivity Real GDP 94. Suppose that real GDP grew more in Country A than in Country B last year. a. Country A must have a higher standard of living than country B. b. Country A's productivity must have grown faster than country B's. c. Both of the above are correct. d. None of the above is correct. ANS: D DIF: 3 REF: 25-2 TOP: Productivity Standard of living MSC: Analytical 95. Which of the following would increase productivity? a. an increase in the physical capital stock per worker b. an increase in human capital per worker c. an increase in natural resources per worker ANS: D DIF: 1 REF: 25-2 TOP: Productivity 96. Which of the following would, by itself, reveal the most about a country s standard of living? a. its level of capital b. the number of hours worked c. its availability of natural resources d. its productivity ANS: D DIF: 2 REF: 25-2 TOP: Productivity Standard of living 97. Human capital is a. the same thing as technological knowledge. b. the same thing as labor. c. the tools and equipment operated by humans. d. knowledge and skills that workers have acquired. ANS: D DIF: 1 REF: 25-2 TOP: Human capital

34 1716 Chapter 25 /Production and Growth 98. Suppose a country imposes new restrictions on how many hours people can work. If these restrictions reduce the total number of hours worked in the economy, but all other factors that determine output are held fixed, then a. productivity and output both rise. b. productivity rises and output falls. c. productivity falls and output rises. d. productivity and output fall. ANS: B DIF: 3 REF: 25-2 TOP: Productivity MSC: Analytical 99. Which of the following would be considered physical capital? a. the available knowledge on how to make semiconductors b. a taxi-cab driver s knowledge of the fastest routes to take c. bulldozers, backhoes and other construction equipment ANS: C DIF: 2 REF: 25-2 TOP: Physical capital 100. Other things the same, which of the following could explain an increase in productivity? a. either an increase in human capital or an increase in physical capital b. an increase in human capital but not an increase in physical capital c. an increase in physical capital but not an increase in human capital d. neither an increase in human capital nor an increase in physical capital ANS: A DIF: 2 REF: 25-2 TOP: Productivity Human capital Physical capital 101. Which of the following is correct? a. Once adjustment is made for inflation, the prices of most natural resources have been about steady or falling. b. Technological progress has allowed us to substitute renewable resources for some nonrenewable resources. c. Technological progress has made once-crucial natural resources less necessary. ANS: D DIF: 1 REF: 25-2 TOP: Natural resources 102. Given that a country s real output has increased, in which of the following cases can we be sure that its productivity also has increased? a. The total number of hours worked rose. b. The total number of hours worked stayed the same. c. The total number of hours worked fell. d. Both b and c are correct. ANS: D DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and Growth TOP: Output Productivity 103. Using the notation and production function in the text, Y/L is a. productivity. b. output. c. the availability of natural resources. d. the amount of human capital. ANS: A DIF: 1 REF: 25-2 TOP: Productivity

35 104. Using the production function and notation in the text, H/L measures a. natural resources per worker. b. human capital per worker. c. output per worker. d. physical capital per worker. ANS: B DIF: 2 REF: 25-2 TOP: Production function Chapter 25 /Production and Growth In a particular production process, if the quantities of all inputs used are increased by 60 percent, then the quantity of output increases by 60 percent as well. This means that a. the production process cannot be enhanced by technological advances. b. no mathematical representation of the relevant production function can be formulated. c. the relevant production function has the limits-to-growth property. d. the relevant production function has the constant-returns-to-scale property. ANS: D DIF: 2 REF: 25-2 TOP: Production function Constant returns to scale 106. If your firm s production function has constant returns to scale, and if you doubled all your inputs, then your firm's output would a. not change. b. increase, but by less than double. c. double. d. more than double. ANS: C DIF: 1 REF: 25-2 TOP: Constant returns to scale 107. 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 has a. decreasing returns to scale. b. zero returns to scale. c. constant returns to scale. d. increasing returns to scale. ANS: C DIF: 1 REF: 25-2 TOP: Production function Constant returns to scale 108. 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). ANS: C DIF: 2 REF: 25-2 TOP: Constant returns to scale 109. If a production function has constant returns to scale, output can be doubled if a. labor alone doubles. b. all inputs but labor double. c. all of the inputs double. d. None of the above is correct. ANS: C DIF: 1 REF: 25-2 TOP: Constant returns to scale

36 1718 Chapter 25 /Production and Growth 110. Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital, and its human capital, but its technology is unchanged. Which of the following would double? a. both output and productivity b. output, but not productivity c. productivity, but not output d. neither productivity nor output ANS: B DIF: 3 REF: 25-2 TOP: Production function Constant returns to scale MSC: Analytical 111. An economy s production function has the constant-returns-to-scale property. If the economy s labor force doubled and all other inputs stayed the same, then real GDP would a. stay the same. b. increase by exactly 50 percent. c. increase by exactly 100 percent. d. increase, but not necessarily by either 50 percent or 100 percent. ANS: D DIF: 3 REF: 25-2 TOP: Constant returns to scale Real GDP MSC: Analytical 112. If the number of workers in an economy doubled, all other inputs stayed the same, and there were constant returns to scale, productivity would a. fall to less than one-half of its former value. b. fall, but it would still be greater than one-half of its former value. c. stay the same. d. rise but less than double. ANS: B DIF: 3 REF: 25-2 TOP: Constant returns to scale Productivity MSC: Analytical 113. If an economy with constant returns to scale were to double its physical capital stock, its available natural resources, and its human capital, but leave the size of the labor force the same, a. its output would stay the same and so would its productivity. b. its output and productivity would increase, but less than double. c. its output and productivity would increase by more than double. d. None of the above is correct. ANS: B DIF: 3 REF: 25-2 TOP: Production function Productivity MSC: Analytical Scenario An economy s production form takes the form Y = AF(L, K, H, N) Refer to Scenario Using the notation in the text, K represents the quantity of a. human capital only. b. physical capital only. c. human capital and physical capital combined. d. nonrenewable natural resources. ANS: B DIF: 2 REF: 25-2 TOP: Production function

37 Chapter 25 /Production and Growth Refer to Scenario In the production function, which variable would increase in value as technology improved? a. A b. K c. H d. N ANS: A DIF: 2 REF: 25-2 TOP: Production function 116. Refer to Scenario If the production function has the constant-returns-to-scale property, then it could be rewritten as a. Y/L = AF(1, K/L, H/L, N/L) b. Y/L = AF(L, 1, H/L, N/L) c. Y/L = AF(L, K/L, 1, N/L) d. Y/L = AF(L, K/L, H/L, 1) ANS: A DIF: 2 REF: 25-2 TOP: Production function Constant returns to scale 117. Refer to Scenario If the production function has the constant-returns-to-scale property, then if we know the values of A, K/L, H/L, and N/L, we also know the value of a. output. b. labor productivity. c. A. ANS: B DIF: 2 REF: 25-2 TOP: Production function Constant returns to scale 118. Refer to Scenario If the production function has the constant-returns-to-scale property, then it is possible that the specific form of the production function is a. Y = 4L + 2K + 3H + N b. Y = (L + K + H + N)/4 c. Y =2 d. Y = 4 ANS: C DIF: 3 REF: 25-2 TOP: Production function Constant returns to scale MSC: Analytical Sec03 - Production and Growth - Economic Growth and Public Policy MULTIPLE CHOICE 1. When workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly. This statement a. represents the traditional view of the production process. b. is an assertion that capital is subject to diminishing returns. c. is made under the assumption that the quantities of human capital, natural resources, and technology are being held constant. ANS: D DIF: 2 REF: 25-3 TOP: Diminishing returns

38 1720 Chapter 25 /Production and Growth 2. When workers have a relatively small quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity by a relatively large amount. This statement a. is an assertion that production functions have the property of constant returns to scale. b. is consistent with the view that capital is subject to diminishing returns. c. is inconsistent with the view that it is easier for a country to grow fast if it starts out relatively poor. ANS: B DIF: 2 REF: 25-3 TOP: Diminishing returns 3. When a society decides to increase its quantity of physical capital, the society a. can avoid the usual need to face trade-offs. b. is apparently not very concerned about its rate of economic growth in the future. c. is in effect deciding to consume fewer goods and services in the present. d. is in effect deciding to save less of its current income in the present. ANS: C DIF: 2 REF: 25-3 TOP: Investment 4. The catch-up effect can help explain a. the spectacular economic growth experienced by South Korea over the years 1960 to b. the spectacular economic growth experienced by the United States over the years 1960 to c. why the diminishing-returns property is no longer taken seriously by economists. d. why the World Bank is more inclined to encourage the flow of capital to advanced economies rather than to developing economies. ANS: A DIF: 2 REF: 25-3 TOP: Catch-up effect

39 Figure On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). Y/L Chapter 25 /Production and Growth 1721 K/L 5. Refer to Figure The curve becomes flatter as the amount of capital per worker increases because of a. increasing returns to capital. b. increasing returns to labor. c. diminishing returns to capital. d. diminishing returns to labor. ANS: C DIF: 1 REF: 25-3 TOP: Diminishing returns 6. Refer to Figure The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher level of productivity. b. In the long run, a higher saving rate leads to a higher level of income. c. In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth rate of income. ANS: D DIF: 2 REF: 25-3 TOP: Diminishing returns Economic growth 7. Refer to Figure The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher growth rate of productivity. b. In the long run, a higher saving rate leads to a higher growth rate of income. c. Returns to capital become increasingly smaller as the amount of capital per worker increases. ANS: C DIF: 2 REF: 25-3 TOP: Diminishing returns Economic growth

40 1722 Chapter 25 /Production and Growth 8. Refer to Figure Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2007, then it will definitely remain at point A in 2008 if, between 2007 and 2008, a. the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural resources, and technology all double as well. b. the quantity of physical capital doubles; human capital, natural resources, and technology all double as well; and the number of workers remains constant. c. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology all double as well. d. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant. ANS: D DIF: 3 REF: 25-3 TOP: Diminishing returns MSC: Analytical 9. Investment in a. physical capital, unlike investment in human capital, has an opportunity cost. b. physical capital, like investment in human capital, has an opportunity cost. c. human capital is particularly attractive because it involves no externalities. d. human capital has been shown to be relatively unimportant, relative to investment in physical capital, for a country s long-run economic success. ANS: B DIF: 2 REF: 25-3 TOP: Physical capital Human capital 10. The return to schooling for society is higher than the return to schooling for the individual if a. the concept of diminishing returns applies to education. b. the concept of constant returns to scale applies to education. c. human capital conveys positive externalities. d. investment in human capital involves no opportunity costs. ANS: C DIF: 2 REF: 25-3 TOP: Human capital Externalities 11. Studies on health, nutrition, and living standards suggest that a. short height can be an indicator of malnutrition. b. workers height and their productivity are unrelated. c. nations economic development and their workers eating habits are unrelated. d. there is no causal link between nutrition and economic growth. ANS: A DIF: 2 REF: 25-3 TOP: Productivity Economic growth 12. Which of the following terms is used to refer to the ability of people to exercise authority over the resources they own? a. natural rights b. property rights c. input control d. collective control ANS: B DIF: 1 REF: 25-3 TOP: Property rights

41 Chapter 25 /Production and Growth In countries that experience political instability, standards of living tend to be low because of a. violations of diminishing returns. b. excessive levels of caloric intake. c. lack of respect for property rights. d. attempts by government officials to thwart the catch-up effect. ANS: C DIF: 2 REF: 25-3 TOP: Property rights Standard of living 14. Countries that pursued outward-oriented policies in the 20th century a. experienced lower rates of economic growth than did countries that pursued inward-oriented policies. b. experienced higher levels of political instability than did countries that pursued inward-oriented policies. c. include Singapore, South Korea, and Taiwan. ANS: C DIF: 2 REF: 25-3 TOP: Free trade 15. Rapid population growth a. was hailed by Thomas Robert Malthus as the key to future economic growth. b. tends to lead to higher levels of educational attainment. c. is the main reason that less developed nations are poor. d. may depress economic prosperity by reducing the amount of capital which each worker has to work with. ANS: D DIF: 2 REF: 25-3 TOP: Population growth 16. It has been suggested that a possible benefit of rapid population growth is the likelihood that when there are more people, then there are more a. teachers, and so students acquire more knowledge and skills. b. people to discover things, and so technological progress is rapid. c. savers, and so capital per worker tends to increase over time. d. consumers, and so economic growth is more rapid. ANS: B DIF: 2 REF: 25-3 TOP: Population growth 17. 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. sacrifice consumption goods and services now in order to enjoy more consumption in the future. c. recycle resources so that future generations can produce goods and services with the accumulated capital. d. None of the above is correct. ANS: B DIF: 1 REF: 25-3 TOP: Investment 18. Accumulating capital a. requires that society sacrifice consumption goods in the present. b. allows society to consume more in the present. c. decreases saving rates. d. involves no tradeoffs. ANS: A DIF: 1 REF: 25-3 TOP: Capital Saving

42 1724 Chapter 25 /Production and Growth 19. The traditional view of the production process is that capital is subject to a. constant returns. b. increasing returns. c. diminishing returns. d. diminishing returns for low levels of capital, and increasing returns for high levels of capital. ANS: C DIF: 1 REF: 25-3 TOP: Diminishing returns 20. If there are diminishing returns to capital, then a. capital produces fewer goods as it ages. b. old ideas are not as useful as new ones. c. increases in the capital stock eventually decrease output. d. increases in the capital stock increase output by ever smaller amounts. ANS: D DIF: 2 REF: 25-3 TOP: Diminishing returns 21. In the long run, a higher saving rate a. cannot increase the capital stock. b. means that people must consume less in the future. c. increases the level of productivity. d. None of the above is correct. ANS: C DIF: 2 REF: 25-3 TOP: Saving 22. In the long run, a higher saving rate a. cannot increase the capital stock. b. increases the growth rate of income. c. increases the growth rate of productivity. d. None of the above is correct. ANS: D DIF: 2 REF: 25-3 TOP: Saving 23. In the long run, an increase in the saving rate a. doesn t change the level of productivity or income. b. raises the levels of both productivity and income. c. raises the level of productivity but not the level of income. d. raises the level of income but not the level of productivity. ANS: B DIF: 2 REF: 25-3 TOP: Saving Productivity 24. If a country were to increase its saving rate, then in the long run it would also increase its a. level of income. b. growth rate of income. c. growth rate of productivity. ANS: A DIF: 2 REF: 25-3 TOP: Saving

43 Chapter 25 /Production and Growth If a country s saving rate declined, then other things the same, in the long run the country would have a. lower productivity, but not lower real GDP per person. b. lower productivity and lower real GDP per person. c. lower real GDP per person, but not lower productivity d. neither lower productivity nor lower real GDP per person. ANS: B DIF: 2 REF: 25-3 TOP: Saving Productivity 26. If a country's saving rate increases, then in the long run a. both productivity growth and income growth increase. b. only productivity growth increases. c. only income growth increases. d. neither productivity growth nor income growth increase. ANS: D DIF: 2 REF: 25-3 TOP: Saving Productivity 27. If a country's saving rate increases, then in the long run a. productivity is higher but real GDP per person is not higher. b. real GDP per person is higher but productivity is not higher. c. productivity and real GDP per person are both higher. d. neither productivity nor real GDP per person is higher. ANS: C DIF: 2 REF: 25-3 TOP: Saving Productivity 28. Other things the same, a country that increases its saving rate increases a. its future productivity and future real GDP. b. neither its future productivity nor future real GDP. c. its future productivity, but not its future real GDP. d. its future real GDP, but not its future productivity. ANS: A DIF: 2 REF: 25-3 TOP: Saving Productivity 29. Other things the same, a country that increases its savings rate will have a. higher future capital and higher future real GDP per person. b. higher future capital but not higher future real GDP per person. c. higher future real GDP per person but not higher future capital. d. neither higher future capital nor higher future real GDP per person. ANS: A DIF: 2 REF: 25-3 TOP: Saving Capital 30. Suppose Turkey increases its saving rate. In the long run a. the growth rates of productivity and real GDP per person increase. b. productivity and real GDP per person increase. c. the growth rate of productivity increases, and real GDP per person increases. d. productivity increases, and the growth rate of real GDP per person increases. ANS: B DIF: 2 REF: 25-3 TOP: Saving

44 1726 Chapter 25 /Production and Growth 31. Suppose that Slovenia undertakes a policy to increase its saving rate. This policy will likely a. have no impact on GDP growth. b. lead to higher GDP growth for a few years. c. lead to higher GDP growth for a period of several decades. d. lead to a permanently higher growth rate. ANS: C DIF: 2 REF: 25-3 TOP: Saving 32. Suppose that a country increased its saving rate. In the long run it would have a. higher productivity, and another unit of capital would increase output by more than before. b. higher productivity, but another unit of capital would increase output by less than before. c. lower productivity, and another unit of capital would increase output by more than before. d. lower productivity, but another unit of capital would increase output by less than before. ANS: B DIF: 3 REF: 25-3 TOP: Saving Diminishing returns MSC: Analytical 33. Other things equal, relatively poor countries tend to grow a. slower than relatively rich countries; this is called the poverty trap. b. slower than relatively rich countries; this is called the fall-behind effect. c. faster than relatively rich countries; this is called the catch-up effect. d. faster than relatively rich countries; this is called the constant-returns-to-scale effect. ANS: C DIF: 1 REF: 25-3 TOP: Catch-up effect 34. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that a. the growth rate will not change in either country. b. the country that started with less capital per worker will grow faster. c. the country that started with more capital per worker will grow faster. d. both countries will grow and at the same rate. ANS: B DIF: 2 REF: 25-3 TOP: Catch-up effect 35. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the long run a. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with more capital. b. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with less capital. c. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with more capital. d. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital. ANS: D DIF: 3 REF: 25-3 TOP: Catch-up effect

45 Chapter 25 /Production and Growth Real GDP per person is $30,000 in Country A, $20,000 in Country B, and $11,000 in Country C. Saving per person is $1,000 in all three countries. Other things equal, we would expect that a. all three countries will grow at the same rate. b. Country A will grow the fastest. c. Country B will grow the fastest. d. Country C will grow the fastest. ANS: D DIF: 2 REF: 25-3 TOP: Catch-up effect 37. Other things the same, if a country increased its saving rate, in 40 years or so it would likely have a. higher productivity, and a higher growth rate of real GDP. b. higher productivity, but not a higher growth rate of real GDP. c. the same productivity and growth of real GDP it began with. d. None of the above is correct. ANS: B DIF: 2 REF: 25-3 TOP: Saving 38. Which of the following best describes the response of output as time passes to an increase in the saving rate? a. The growth rate of output does not change. b. The growth rate of output increases and gets even larger as time passes. c. The growth rate of output increases and does not change as time passes. d. The growth rate of output increases, but diminishes to its former level as time passes. ANS: D DIF: 2 REF: 25-3 TOP: Saving Diminishing returns 39. An increase in the saving rate would, other things the same, a. increase growth more for a poor country than for a rich country, and raise growth permanently. b. increase growth more for a poor country than for a rich country, but raise growth temporarily. c. increase growth more for a rich country than for a poor country, and raise growth permanently. d. increase growth more for a rich country than for a poor country, but raise growth temporarily. ANS: B DIF: 3 REF: 25-3 TOP: Catch-up effect 40. Consider three imaginary countries. In Old York, saving amounts to $3,000 and consumption amounts to $7,000; in New Frank, saving amounts to $2,000 and consumption amounts to $8,000; and in Ganzee, saving amounts to $4,500 and consumption amounts to $10,500. The saving rate is a. higher in Old York than in Ganzee, and it is higher in Ganzee than in New Frank. b. higher in New Frank than in Ganzee, and it is higher in Ganzee than in Old York. c. higher in Ganzee than in New Frank, and it is the same in New Frank and Old York. d. higher in Old York than in New Frank, and it is the same in Old York and Ganzee. ANS: D DIF: 2 REF: 25-3 TOP: Saving

46 1728 Chapter 25 /Production and Growth 41. The traditional view of the production process is that capital is subject to a. diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries. b. diminishing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich countries. c. increasing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries. d. increasing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich countries. ANS: A DIF: 2 REF: 25-3 TOP: Catch-up effect Diminishing returns 42. The traditional view that the production process has diminishing returns implies that a. the increase in output growth from an increase in the saving rate rises over time, and that, other things the same, rich countries should grow faster than poor ones. b. the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, rich countries should grow faster than poor ones. c. the increase in output growth from an increase in the saving rate rises over time, and that, other things the same, poor countries should grow faster than rich ones. d. the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, poor countries should grow faster than rich ones. ANS: D DIF: 2 REF: 25-3 TOP: Diminishing returns Catch-up effect 43. On a production function, as capital per worker increases, output per worker a. increases. This increase is larger at larger values of capital per worker. b. increases. This increase is smaller at larger values of capital per worker. c. decreases. This decrease is larger at larger value of capital per worker. d. decreases. This decrease is smaller at larger value of capital per worker. ANS: B DIF: 2 REF: 25-3 TOP: Production function Diminishing returns 44. The slope of the production function with capital per worker on the horizontal axis and output per worker on the vertical axis a. is positive and gets steeper as capital per worker rises. b. is positive and gets flatter as capital per worker rises. c. is negative and gets steeper as capital per worker rises. d. is negative and gets flatter as capital per worker rises. ANS: B DIF: 2 REF: 25-3 TOP: Production function Diminishing returns 45. The catch-up effect refers to the idea that a. saving will always catch-up with investment spending. b. it is easier for a country to grow fast and so catch-up if it starts out relatively poor. c. population eventually catches-up with increased output. d. if investment spending is low, increased saving will help investment to "catch-up." ANS: B DIF: 1 REF: 25-3 TOP: Catch-up effect

47 Chapter 25 /Production and Growth The logic behind the catch-up effect is that a. workers in countries with low incomes will work more hours than workers in countries with high incomes. b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. 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 is correct. ANS: C DIF: 2 REF: 25-3 TOP: Catch-up effect 47. Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth century? a. Ethiopia b. the United States c. Canada d. South Korea ANS: D DIF: 1 REF: 25-3 TOP: Catch-up effect 48. Which of the following is consistent with the catch-up effect? a. The United States had a higher growth rate before 1900 than after. 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. ANS: D DIF: 2 REF: 25-3 TOP: Catch-up effect 49. Over the period , a. South Korea had a higher growth rate than the United States because it had a higher ratio of investment to GDP. b. the United States had a higher growth rate than South Korea because it had a higher ratio of investment to GDP. c. South Korea had a higher growth rate than the United States even though it had a similar ratio of investment to GDP. d. the United States had a higher growth rate than South Korea even though it had a similar ratio of investment to real GDP. ANS: C DIF: 2 REF: 25-3 TOP: Catch-up effect 50. Lower Equitorial and Upper Equitorial are the same except Lower Equitorial has a larger capital stock. Both countries undertake policies that raise their saving rates to the same higher level. We would expect that a. both countries would have permanent increases in their growth rates, but the increase would initially be larger in Lower Equitorial. b. both countries would have permanent increases in their growth rates, but the increase would initially be smaller in Upper Equitorial. c. both countries would have temporary increases in their growth rates, but the increase would be larger in Lower Equitorial. d. both countries would have temporary increases in their growth rates, but the increase would be smaller in Lower Equitorial. ANS: D DIF: 2 REF: 25-3 TOP: Catch-up effect

48 1730 Chapter 25 /Production and Growth 51. If an American-based firm opens and operates a new watch factory in Panama, then it is engaging in a. foreign portfolio investment. b. foreign financial investment. c. foreign direct investment. d. indirect foreign investment. ANS: C DIF: 1 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment 52. In the 1800s, Europeans purchased stock in American companies that used the funds to build railroads and factories. The Europeans who did this engaged in a. foreign portfolio investment. b. indirect domestic investment. c. foreign direct investment. d. foreign indirect investment. ANS: A DIF: 1 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment Economic growth 53. Suppose that an American opens and operates a candy factory in Finland. This is an example of a. foreign direct investment. American saving is used to finance Finish investment. b. foreign direct investment. American saving is used to finance American investment. c. foreign portfolio investment. American saving is used to finance Finish investment. d. foreign portfolio investment. American saving is used to finance American investment. ANS: A DIF: 1 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment 54. Foreign saving is used for domestic investment when foreigners engage in a. foreign direct investment. b. foreign portfolio investment. c. either foreign direct investment or foreign portfolio investment. d. None of the above is correct. ANS: C DIF: 1 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment 55. Suppose U.S.-based Intel Corporation builds and operates a new computer chip factory in Honduras. Future production from such an investment would a. increase Honduran GDP more than it would increase Honduran GNP. b. increase Honduran GNP more than it would increase Honduran GDP. c. not affect Honduran GNP, but would increase Honduran GDP. d. have no affect on either Honduran GDP or GNP. ANS: A DIF: 2 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment Gross domestic product Gross national product 56. Suppose Japanese-based Sony Corporation builds and operates a new digital camera factory in the United States. Future production from such an investment would a. increase U.S. GNP more than it would increase U.S. GDP. b. increase U.S. GDP more than it would increase U.S. GNP. c. not affect U.S. GNP, but would increase U.S. GDP. d. have no affect on U.S. GNP or GDP. ANS: B DIF: 2 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment Gross domestic product Gross national product

49 Chapter 25 /Production and Growth The opening of a new American-owned factory in Egypt would tend to increase Egypt's GDP more than it increases Egypt's GNP because a. some of the income from the factory accrues to people who do not live in Egypt. 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 Egypt's GDP. ANS: D DIF: 2 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment Gross domestic product Gross national product 58. When Mexico experiences investment from abroad, it experiences, as a result, a. an increase in productivity. b. a decrease in Gross National Product (GNP). c. lower wages for Mexican workers. d. None of the above is correct. ANS: A DIF: 2 REF: 25-3 NAT: Analytic LOC: International trade and finance TOP: Foreign investment Productivity 59. 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 viewed by economists as a way to increase growth. c. often requires removing restrictions that governments have imposed on foreign ownership of domestic capital. ANS: D DIF: 1 REF: 25-3 TOP: Foreign investment 60. 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. ANS: A DIF: 1 REF: 25-3 TOP: Foreign investment World Bank 61. In the U.S., each additional year of schooling has historically raised a person's wage on average by about a. 2 percent. b. 5 percent. c. 10 percent. d. 15 percent. ANS: C DIF: 1 REF: 25-3 TOP: Wages 62. The term human capital can be used to describe a. technology. b. unskilled labor. c. expenditures that result in increased investment from abroad. d. health. ANS: D DIF: 1 REF: 25-3 TOP: Human capital

50 1732 Chapter 25 /Production and Growth 63. In the U.S., each additional year of schooling has historically raised a person's wage on average by about a. 5 percent. In less developed countries the gap between the wages of educated and uneducated workers is smaller. b. 10 percent. In less developed countries the gap between the wages of educated and uneducated workers is smaller. c. 5 percent. In less developed countries the gap between the wages of educated and uneducated workers is larger. d. 10 percent. In less developed countries the gap between the wages of educated and uneducated workers is larger. ANS: D DIF: 2 REF: 25-3 TOP: Wages 64. Which of the following is generally an opportunity cost of investment in human capital? a. future job security b. forgone present wages c. increased earning potential ANS: B DIF: 1 REF: 25-3 TOP: Human capital 65. Educated people may generate ideas that increase production. These ideas a. produce a return to society from education that is greater than the return to the individual. b. could justify government subsides for education. c. are external benefits of education. ANS: D DIF: 1 REF: Which of the following is an example of the "brain drain?" a. A country's most highly educated workers emigrate to rich countries. b. A country has such a poor educational system that human capital falls over time. c. The population of a country grows so fast that the educational system can't keep up. d. A country steals patented technology from another country. ANS: A DIF: 1 REF: 25-3 TOP: Human capital 67. Economist Robert Fogel focused on which of the following factors as one determinant of long-run economic growth? a. education b. research and development c. nutrition d. trade restrictions ANS: C DIF: 1 REF: According to research by Robert Fogel, what proportion of the British population in 1780 was so malnourished that they could not perform manual labor? a. 40 percent b. 20 percent c. 10 percent d. 5 percent ANS: B DIF: 1 REF: 25-3

51 Chapter 25 /Production and Growth Roughly what percentage of growth in real GDP per person in Britain between 1790 and 1980 was accounted for by improved nutrition according to the estimates of Robert Fogel? a. 30 percent b. 20 percent c. 10 percent d. 5 percent ANS: A DIF: 1 REF: Which of the following statements is correct? a. In an economy-wide sense, property rights are an important prerequisite for the price system to work. b. Property rights give people the ability to exercise authority over the resources they own. c. Based on the available evidence, the existence of well-established and well-enforced property rights appears to be associated with an enhanced standard of living. ANS: D DIF: 1 REF: 25-3 TOP: Property rights 71. The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political opponents, and he has given the farms to his friends. His friends don't know much about farming. The courts in Turan have ruled that the seizures are illegal, but the dictator has ignored the rulings. Other things equal, we would expect that the growth rate in Turan will a. fall temporarily, but will return to where it was when the new owners learn how to farm. b. increase because the total amount of human capital in the country will increase as the new owners learn how to farm. c. fall and remain lower for a long time. d. not be affected unless widespread civil disorder or civil war results. ANS: C DIF: 3 REF: 25-3 TOP: Political behavior 72. The dictator of a certain country requires that companies planning to open or expand must pay a large fee to file an application one year prior to building new factories or expanding existing ones. Other things the same, in the long run this requirement would a. reduce real GDP per person and productivity. b. reduce real GDP per person but not productivity. c. reduce productivity but not real GDP per person. d. None of the above is correct. ANS: A DIF: 2 REF: 25-3 TOP: Property rights 73. Suppose that a new government is elected in Lawrencia. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Lawrencia find these efforts credible and outsiders believe these changes will be effective and long lasting. These changes will probably a. raise real GDP per person and productivity in Lawrencia. b. raise real GDP per person but not productivity in Lawrencia. c. raise productivity but not real GDP per person in Lawrencia. d. raise neither productivity nor real GDP per person in Lawrencia. ANS: A DIF: 2 REF: 25-3 TOP: Property rights

52 1734 Chapter 25 /Production and Growth 74. Inward-oriented policies a. include imposing tariffs and other trade restrictions. b. have generally increased productivity and growth in the countries that pursued them. c. promote the production of goods and services that the country produces most efficiently. ANS: A DIF: 1 REF: 25-3 TOP: Trade policy 75. Inward-oriented policies a. are generally supported by economists. b. are primarily concerned with the development of human capital. c. in some ways are like prohibiting the use of certain technologies. ANS: C DIF: 1 REF: 25-3 TOP: Trade policy 76. The president of Improvia, a developing country, proposes that his country needs to help domestic firms by imposing trade restrictions. a. These are outward-oriented policies and most economists believe they would have beneficial effects on growth in Improvia. b. These are outward-oriented policies and most economists believe they would have adverse effects on growth in Improvia. c. These are inward-oriented policies and most economists believe they would have beneficial effects on growth in Improvia. d. These are inward-oriented policies and most economists believe they would have adverse effects on growth in Improvia. ANS: D DIF: 2 REF: 25-3 TOP: Trade policy 77. In the past there have been violent protests against the World Bank and the World Trade Organization. The protesters argued that these institutions promote free trade and also encourage corporations in rich countries to invest in poor countries. The protesters contended that these practices make rich countries richer and poor countries poorer. An economist would a. disagree with the protesters because these practices will help make both rich and poor countries richer. b. disagree with the protesters about free trade, but would agree with the protesters about corporate investment. c. disagree with the protesters about corporate investment, but would agree with the protesters about free trade. d. agree with the protesters. ANS: A DIF: 2 REF: 25-3 TOP: Trade policy 78. Outward-oriented policies a. allow countries to take advantage of gains from trade. b. have generally led to high growth for the countries that pursued them. c. receive widespread support from economists. ANS: D DIF: 2 REF: 25-3 TOP: Trade policy

53 Chapter 25 /Production and Growth When a country removes trade barriers and imports toys and exports farm machinery, a. its growth slows. b. its productivity decreases. c. it is essentially transforming farm machinery into toys. d. its economic well-being decreases while that of the country that sells toys increases. ANS: C DIF: 2 REF: 25-3 TOP: Trade policy 80. Suppose a country reduces trade restrictions. This country would be pursing an a. inward policy, which most economists believe has beneficial effects on the economy. b. inward policy, which most economists believe has adverse effects on the economy. c. outward policy, which most economists believe has beneficial effects on the economy. d. outward policy, which most economists believe has adverse effects on the economy. ANS: C DIF: 1 REF: 25-3 TOP: Trade policy 81. National defense and knowledge are generally considered to be a. private goods. b. public goods. c. proprietary goods. d. societal goods. ANS: B DIF: 1 REF: 25-3 NAT: Analytic LOC: The Study of Economics, and definitions of economics TOP: Public goods 82. Patents turn new ideas into a. public goods, and increase the incentive to engage in research. b. public goods, but decrease the incentive to engage in research. c. private goods, and increase the incentive to engage in research. d. private goods, but decrease the incentive to engage in research. ANS: C DIF: 1 REF: 25-3 NAT: Analytic LOC: The Study of Economics, and definitions of economics TOP: Private goods 83. Once an idea enters society's pool of knowledge, the knowledge becomes a a. societal good. b. private good. c. public good. d. proprietary good. ANS: C DIF: 1 REF: 25-3 NAT: Analytic LOC: The Study of Economics, and definitions of economics TOP: Public goods 84. In medieval Europe an important technological advance was the use of the padded horse collar for plowing. Once this idea was thought of, other people used it. This illustrates that knowledge is generally a a. public good. b. societal good. c. private good. d. normal good. ANS: A DIF: 1 REF: 25-3 NAT: Analytic LOC: The Study of Economics, and definitions of economics TOP: Public goods

54 1736 Chapter 25 /Production and Growth 85. Inventors often obtain patents on new products and processes, thereby turning new ideas into a. private goods and increasing the incentive to engage in research. b. private goods but decreasing the incentive to engage in research. c. public goods and increasing the incentive to engage in research. d. public goods but decreasing the incentive to engage in research. ANS: A DIF: 1 REF: 25-3 NAT: Analytic LOC: The Study of Economics, and definitions of economics TOP: Private goods 86. Malthus predicted that the power of population a. was greater than the power of the earth to produce subsistence. His forecast was on the mark. b. was greater than the power of the earth to produce subsistence. His forecast was off the mark. c. was less than the power of the earth to produce subsistence. His forecast was on the mark. d. was less than the power of the earth to produce subsistence. His forecast was off the mark. ANS: B DIF: 1 REF: 25-3 TOP: Economists Population growth 87. A rapid increase in the number of workers, other things the same, is likely in the short term to a. raise real GDP per person, but decrease real GDP. b. decrease both real GDP and real GDP per person. c. raise both real GDP and real GDP per person. d. raise real GDP, but decrease real GDP per person. ANS: D DIF: 1 REF: 25-3 TOP: Population growth 88. Which of the following is not correct? a. China allows only one child per family and couples that violate this rule are subject to substantial fines. b. In developed countries, population growth is consistently about 3 percent per year; in developing countries it is consistently about 5 percent per year. c. Educational attainment tends to be lowest in countries with the highest population growth. d. Economists generally believe that a country that decreases a high population growth rate can increase its economic growth rate. ANS: B DIF: 1 REF: 25-3 TOP: Population growth 89. Which of the following countries achieved higher economic growth, in part by mandating a reduction in population growth? a. Great Britain b. China c. Australia d. France ANS: B DIF: 2 REF: 25-3 TOP: Population growth 90. Which of the following is an observation made by economist Michael Kremer? a. World growth rates increased as the population increased. b. Technological progress allows for increasing population because of advances in agriculture. c. World population is growing so rapidly that soon it will outstrip natural resources and our standard of living will decline. d. All of the above are observations made by Kremer. ANS: A DIF: 1 REF: 25-3 TOP: Population growth

55 Chapter 25 /Production and Growth Which of the following is correct? a. If developing countries limit career and educational opportunities for women, birth rates are likely to be lower. b. Growth rates in developed and developing countries are nearly the same. c. Historically, in periods where the rate of population growth was high, so was the rate of growth in world real GDP per person. d. None of the above is correct. ANS: C DIF: 2 REF: 25-3 TOP: Population growth 92. Which of the following is true? a. Kremer argued that with greater population, society would generate more ideas so that growth of real GDP per person could continue. Malthus argued that increasing population would outstrip agricultural production. b. Kremer argued that increases in population would reduce the amount of human and physical capital per worker so that eventually the standard of living would decline. Malthus argued that increases in technology would allow increased output growth so that even with population growth, society would enjoy a higher standard of living. c. Malthus argued that with greater population, society would generate more ideas so that growth of real GDP per person could continue. Kremer argued that increasing population would outstrip agricultural production. d. Malthus argued that increases in population would reduce the amount of human and physical capital per worker so that eventually the standard of living would decline. Kremer argued that increases in technology would allow increased output growth so that even with population growth, society would enjoy a higher standard of living. ANS: A DIF: 2 REF: 25-3 TOP: Population growth 93. Over extended periods of time, population growth a. has no effect on the standard of living. b. has uncertain effects on the standard of living. c. clearly raises the standard of living. d. clearly lowers the standard of living. ANS: B DIF: 2 REF: 25-3 TOP: Population growth Standard of living 94. On the basis of theory and empirical evidence, economists have reached several conclusions about economic growth. Which of the following is not one of these conclusions? a. A relatively simple way to increase growth rates permanently is to increase a country's saving rate. b. Growth is generally inhibited rather than promoted by policies like protective tariffs. c. Well-established property rights that are enforced by fair and efficient courts are important to economic growth. d. Countries with few domestic natural resources still have opportunities for economic growth. ANS: A DIF: 2 REF: All else equal, which of the following would tend to cause real GDP per person to rise? a. a change from outward-oriented policies to inward-oriented policies b. an increase in investment in human capital c. a weakening of property rights ANS: B DIF: 1 REF: 25-3

56 1738 Chapter 25 /Production and Growth 96. Which of the following statements is not correct? a. The catch-up effect is based on the assumption of diminishing returns to capital. b. Investment in poor countries by citizens of rich countries is one way poor countries can learn new technologies. c. Malthus argued that charity and government aid was an effective way to reduce poverty. d. Peace and justice are keys to growth. ANS: C DIF: 2 REF: Senator Noitall says that in order to help poor countries develop, the United States should: 1. Prevent U.S. corporations from investing in poor countries because they take profits that the poor countries should have; 2. Not import goods from poor countries that use child labor; 3. Work to promote political stability in poor countries; and 4. Reduce poor countries reliance on market forces in their economies. How many of these ideas are likely to help poor countries grow? a. 1 b. 2 c. 3 d. 4 ANS: A DIF: 2 REF: Senator Smith says that in order to help poor countries develop, the United States should: 1. Prevent U.S. corporations from investing in poor countries because they take profits that the poor countries should have; 2. reduce or eliminate subsidizes to U.S. producers when poor countries have a comparative advantage producing those goods the U.S. subsidizes; 3. Work to promote political stability in poor countries; and 4. Reduce poor countries reliance on market forces in their economies. How many of these ideas are likely to help poor countries grow? a. 1 b. 2 c. 3 d. 4 ANS: B DIF: 2 REF: The president of a poor country has announced that he will implement the following measures which he claims are designed to increase growth: 1. Reduce corruption in the legal system; 2. Reduce reliance on market forces because they allocate goods and services in an unfair manner; 3. Restrict investment in domestic industries by foreigners because they take some of the profits out of the country; 4. Encourage trade with neighboring countries; and 5. Increase the fraction of GDP devoted to consumption. How many of these measures will have a positive effect on growth? a. 1 b. 2 c. 3 d. 4 ANS: B DIF: 3 REF: 25-3

57 Chapter 25 /Production and Growth The Economic Development Minister of a country has a list of things she thinks may explain her country's low growth of real GDP per person relative to other countries. She asks you to pick the one you think most likely explains her country's low growth. Which of the following contributes to low growth? a. poorly enforced property rights b. outward-oriented trade policies c. policies that permit foreign investment ANS: A DIF: 2 REF: Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the following could explain the failure of a poor county to catch up? a. The poor country has outward-oriented trade policies. b. The poor country allows foreign direct investment. c. The poor country has poorly developed property rights. ANS: C DIF: 2 REF: 25-3 TOP: Economic growth Property rights 102. Other things the same, a country that increases its saving rate increases a. its future productivity and future real GDP. b. neither its future productivity nor future real GDP. c. its future productivity, but not its future real GDP. d. its future real GDP, but not its future productivity. ANS: A DIF: 2 REF: 25-3 TOP: Saving Productivity 103. In an economy where net exports are zero, if saving rises in some period, then in that period a. consumption and investment fall. b. consumption falls and investment rises. c. consumption rises and investment falls. d. consumption rises and investment falls. ANS: B DIF: 1 REF: 25-3 TOP: Saving Investment 104. Other things the same, if a country raises its saving rate, then in the long run a. both the level and growth rate of real GDP are unchanged. b. the level of real GDP is higher but the growth rate of real GDP is unchanged. c. both the level and growth rate of real GDP are higher. d. None of the above are correct. ANS: B DIF: 2 REF: 25-3 TOP: Saving Investment 105. All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit? a. Output will rise by more than it did when the previous unit was added. b. Output will rise but by less than it did when the previous unit was added. c. Output will fall by more than it did when the previous unit was added. d. Output will fall but by less then it did when the previous unit was added. ANS: B DIF: 2 REF: 25-3 TOP: Diminishing returns

58 1740 Chapter 25 /Production and Growth 106. All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100 units this year, a. the increase in output was greater for this year than last year. b. the increase in output was greater last year than this year. c. the increase in output is the same in both years. d. None of the above is necessarily correct. ANS: B DIF: 2 REF: 25-3 TOP: Diminishing returns 107. All else equal, if there are diminishing returns, then what happens to productivity if both capital and labor increase? a. Productivity will definitely fall. b. Productivity will definitely be unchanged. c. Productivity will definitely rise. d. None of the above are necessarily correct. ANS: D DIF: 3 REF: 25-3 TOP: Diminishing returns Productivity MSC: Analytical 108. Country A and country B are the same except country A currently has a lower level of capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then a. output in country A increases by more than in country B. b. output in country A increases by the same amount as in country B. c. output in country A increases by less than in country B. d. None of the above is necessarily correct. ANS: A DIF: 2 REF: 25-3 TOP: Diminishing returns Catch-up effect 109. A country with a relatively low level of real GDP per person is considering adopting two policies to promote economic growth. The first is to increase barriers to trade. The second is to restrict foreign portfolio investment. Which of these policies would most economist think would promote growth? a. both the first and the second b. the first but not the second c. the second but not the first d. neither the first nor the second ANS: D DIF: 1 REF: 25-3 TOP: Free trade Foreign investment 110. Other things the same, higher population growth a. raises the amount of physical capital per worker and there is some evidence that it raises the pace of technological progress. b. raises the amount of physical capital per worker, but there is some evidence that it reduces the pace of technological progress. c. reduces the amount of physical capital per worker, but there is some evidence that it raises the pace of technological progress. d. reduces the amount of physical capital per worker and there is some evidence that it reduces the pace of technological progress. ANS: C DIF: 1 REF: 25-3 TOP: Population growth

59 Chapter 25 /Production and Growth Electronics firms may be able to get patents on their ideas. Doing so makes their ideas a. private goods rather than public goods. This gives people more incentive to engage in research. b. private goods rather than public goods. This gives people less incentive to engage in research. c. public goods rather than private goods. This gives people more incentive to engage in research. d. public goods rather than private goods. This gives people more incentive to engage in private research. ANS: A DIF: 1 REF: 25-3 TOP: Private goods Public goods 112. If Dark Nights, a U.S.manufacturer of winter clothing, opens a new factory in Austria, then a. Austrian GNP increases by more than Austrian GDP, which includes income earned by foreigners working in Austria. b. Austrian GNP increases by more than Austrian GDP, which excludes income earned by foreigners working in Austria. c. Austrian GNP increases by less than Austrian GDP, which includes income earned by foreigners working in Austria. d. Austrian GNP increases by less than Austrian GDP, which excludes income earned by foreigners working in Austria. ANS: C DIF: 2 REF: 25-3 TOP: Foreign investment Gross domestic product Gross national product 113. Which of the following is correct? a. There is no debate about the effects of higher population growth on economic growth. b. Natural resources clearly place limits on growth; there is simply no way to reduce either the amount or type of natural resources needed to produce goods. c. How much an increase in capital increases a country s output is independent of that country s current level of capital. d. Economists argue that outward rather than inward policies are likely to promote economic growth. ANS: D DIF: 2 REF: Which of the following provide benefits to society at large and not just to the person(s) who pursues it? a. both technological knowledge that is a public good and education b. technological knowledge that is a public good, but not education c. education, but not technological knowledge that is a public good d. neither education, nor technological knowledge that is a public good ANS: A DIF: 1 REF: 25-3 TOP: Technology Public goods 115. By saving more, a country a. has more resources for capital goods. The increase in capital raises productivity. b. has more resources for capital goods. The increase in capital reduces productivity. c. has fewer resources for capital goods. The decrease in capital raises productivity. d. has fewer resources for capital goods. The decrease in capital reduces productivity. ANS: A DIF: 1 REF: 25-1 TOP: Saving Productivity

60 1742 Chapter 25 /Production and Growth Sec04 - Production and Growth - Conclusion MULTIPLE CHOICE 1. Economists differ in their views of the role of the government in promoting economic growth. At the very least, the government should a. lend support to the invisible hand by maintaining property rights and political stability. b. limit foreign investment to industries that don't already exist in the country. c. impose trade restrictions to protect the interests of domestic producers and consumers. d. subsidize key industries. ANS: A DIF: 1 REF: 25-4