Chapter 25. Production and Growth.

1. Most economists believe that

a. increased investment leads to higher economic growth.Correct. Investment is one of the keys to higher capital goods and more growth

b. higher economic growth leads to lower investment.Incorrect. Higher investment leads to higher growth.

c. increased investment does not affect economic growth.Incorrect. Higher investment leads to higher growth.

d. increased investment causes increasing savings.

Incorrect. Increased savings causes increased investment..

2. Which of the following would be most likely to improve the standard of living of a poorer nation?

a. development of strong labor unionsIncorrect. This would raise wages but not productivity.

b. policies that increase educational opportunities for a country's populationCorrect. Education increases the amount of human capital.

c. adoption of trade barriers (higher tariffs and quotas)Incorrect. This would work against comparative advantage and foreign investment.

d. widespread use of price controls to allocate goods and resourcesIncorrect. This would make markets less efficient and lower economic growth.

3. Which one of the following countries would most likely be considered a poorer nation?

a. CanadaIncorrect. According to the data in Chapter 25, Canada has a real GDP per person of over $20,000.

b. West GermanyIncorrect. According to the data in Chapter 25, West Germany has a real GDP per person of over $20,000.

c. Japan

Incorrect. According to the data in Chapter 25, Japan has a real GDP per person of over $23,000.

d. PakistanCorrect. According to the data in Chapter 25, Pakistan had a real GDP per person in 2000 of $1590.

4. Which of the following is NOT a determinant of productivity?

a. physical capitalIncorrect. This is one of the key determinants of a nation's productivity.

b. human capital

Incorrect. This is one of the key determinants of a nation's productivity.

c. wagesCorrect. Wages are the cost of labor not a determinant of productivity.

d. technological knowledge

Incorrect. This is one of the key determinants of a nation's productivity.

5. Which of the following is likely to lead to a decrease in birth rates?

a. decreasing the opportunity cost of having childrenIncorrect. Decreasing the cost of have children would increase their numbers.

b. more desirable employment for womenCorrect. This raises the productivity of women and increases the opportunity cost of children.

c. less desirable employment for womenIncorrect. This would lower the opportunity cost of having children.

d. increasing the cost of birth controlIncorrect. This would reduce the use of birth control and increase births.

6. Which of the following statements is correct?

a. In general, a given level of investment in a poor country will lead to greater economic growth than the same level of investment in a rich country.Correct. A poor country can enjoy the benefits of catching up with the technology of rich countries.

b. If a nation invests more, its economic growth rate will be permanently higher.Incorrect. A nation must maintain high investment to enjoy continuous growth.

c.

A nation must have abundant natural resources if it is to experience rapid economic growth.Incorrect. There does not seem to be a correlation between natural resources and economic growth. Japan has few natural resources and is a very rich country.

d. Increased economic growth through increased investment does not have an opportunity cost.Incorrect. All choices in the use of resources involve opportunity costs.

7. Productivity refers to

a. the rate at which a nation's income grows.

Incorrect. This would be the GDP growth rate. b. the amount of goods and services produced from each hour of a worker's time.Correct. Productivity measures output per some unit of resource use.

c. the amount of dollars invested in the stock market.Incorrect. This is a measure of saving.

d. the amount of human and physical capital available in an economy.Incorrect. This is a measure of resource availability not the output from a resource.

8. Which of the following might government encourage in order to increase productivity?

a. discourage investment from abroad.Incorrect. Foreign investment add capital and increases growth.

b. discourage its citizens to save more.Incorrect. Saving is necessary for increased investment.

c.

fail to enforce property rights.Incorrect. Property rights help markets function to increase growth.

d. discourage tariffs and quotas. Correct. Tariffs and quotas reduce the benefits from international trade.

9. Why does political instability and insecurity of property rights retard economic growth?

a. Fear that private property will be confiscated substantially reduces the incentive of individuals to invest and create wealth.Correct. All forms of uncertainty discourage foreign and domestic investment.

b. When property rights are insecure, foreign investors are more willing to invest in the country.Incorrect. Insecure property rights scare away foreign investment.

c. Savings flow into a country if individuals fear their property is insecure.Incorrect. Saving flows out of a country with shaky property rights.

d. Political instability and corruption can enhance the coordinating power of the market.Incorrect. Markets need good property rights and honest transactions to function well.

10. Which one of the following countries had the lowest real GDP per person in 2000?

a. BangladeshCorrect. According to the data in Chapter 25, the real GDP per person for Bangladesh was around $1650 in 2000.

b. IndiaIncorrect. According to the data in Chapter 25, India had a real GDP per person of $2390 in 2000.

c. PakistanIncorrect. According to the data in Chapter 25, Pakistan had a real GDP per person of $1960 in 2000.

d. Argentina

Incorrect. According to the data in Chapter 25, Argentina had a real GDP per person of $12090 in 2000. .

11. Compared to richer countries, poorer countries are generally characterized by:

a. high real GDP per person.Incorrect. This is the sign of a richer country.

b. political stability.Incorrect. Higher income countries have higher levels of political stability.

c. rapid population growth.Correct. Higher incomes increase the opportunity costs of having children.

d. strongly enforced property rights.Incorrect. Higher income countries have more strongly enforced property rights.

12. In recent decades, the population of poorer countries has generally

a. grown very slowly.

Incorrect. Poorer countries have low opportunity costs for having more children and therefore have more children.

b. grown more rapidly than the population of richer countries.Correct. Poorer countries have a lower opportunity cost for having children.

c. grown at approximately the same rate as richer countries.Incorrect. Poorer countries have low opportunity costs for having more children and therefore have more children.

d. grown much less rapidly than the population of richer countries.Incorrect. Poorer countries have low opportunity costs for having more children and therefore have more children.

13. The recent growth record of Japan indicates that a nation can grow rapidly without

a. securely defined property rights.Incorrect. Property rights in Japan are well defined and protected.

b. the adoption of modern technology.Incorrect. Japan is noted for its very high level of technology.

c. significant amounts of capital formation.Incorrect. Japan has a very high saving rate and high levels of investment.

d. abundant domestic natural resources.Correct. Japan has very few natural resources and is still a very rich country.

14. Which of the following factors would be most likely to encourage capital formation in a poorer nation?

a. the expectation of sustained high rates of inflation in the futureIncorrect. High rates of inflation reduce the real rates of return on investments.

b. the expectation that property rights would remain secureCorrect. This would give capital goods owners an incentive to increase their investments.

c. the expectation that a struggle between capitalist and socialist forces would lead to major structural change in the economyIncorrect. This would make property rights less secure.

d. an increase in corporate taxes in order to finance an expanded government welfare programIncorrect. This would reduce the return to investment spending.

15. Which of the following is most likely to contribute to the growth of a poorer country?

a. price controls that keep the cost of agricultural products lowIncorrect. This would reduce the incentive to produce agricultural products.

b. rapid population growthIncorrect. This would reduce real GDP per person.

c. exchange rate controls and export restrictionsIncorrect. This would reduce the benefits from foreign trade and investment.

d. secure property rights and political stabilityCorrect. This would give an incentive to make and increase investments.

16. Which of the following is the most important source of differences in living standards between nations (and between time periods)?

a. non-pecuniary working conditionsIncorrect. This may not directly affect productivity.

b. percentage of the labor force that is unionizedIncorrect. This would raise wages but not productivity.

c. the distribution of incomeIncorrect. This would not increase total income just relative shares.

d. productivityCorrect. This determines the amount of output from a nation's resources.

17. Generally speaking from society's viewpoint, the returns to research and development undertaken by firms

a. is a public good.Correct. Research has many external benefits to all parts of the economy.

b. is a private good.Incorrect. Research has many external benefits to all parts of the economy.

c. should never be supported by government.Incorrect. Governments should support goods with external benefits.

d. will never occur if a system of patents is not put into place.Incorrect. Private research may be reduced but government research would not be affected.

18. An increase in saving means that

a. economic growth will slow.

Incorrect. Economic growth will increase due to increased saving.

b. labor productivity will fall.Incorrect. The increased investment will raise output per worker.

c. fewer consumer goods and services will be produced.Correct. This is the opportunity cost of more investment.

d. unemployment will increase.Incorrect. More workers will produce investment goods.

19. Small changes in the growth rate of real GDP per person will have

a. small impacts on current standards of living.Incorrect. There will also be large long term effects.

b. large impacts on long-term future standards of living.Incorrect. There will also be some small short term effects.

c. small impacts on either current standards of living or long run standards of living.Incorrect. The short term effects are small but the long term effects are large.

d. small impacts on current standards of living but large impacts on long-term future standards of living.Correct. The percentage rates are small but over time yield large absolute changes.

20. Suppose that factory output rose from 50,000 units to 55,000 units while labor hours rose from 1100 to 1200. Which of the following is true?

a. Labor productivity remained unchanged.Incorrect. The percentage increase in output is slightly larger than the percentage increase in labor. Therefore productivity will rise.

b. Labor productivity increased slightly.Correct. The percentage increase in output is slightly larger than the percentage increase in labor. Therefore productivity will rise.

c. Labor productivity decreased slightly.Incorrect. The percentage increase in output is slightly larger than the percentage increase in labor. Therefore productivity will rise.

d. Labor productivity increased sharply.Incorrect. The percentage increase in output is slightly larger than the percentage increase in labor. Therefore productivity will rise slightly.

21. What is the best measure of productivity?

a. an increase in total real GDPIncorrect. This an increase in an absolute number not a ratio.

b. an increase in total nominal GDPIncorrect. This an increase in an absolute number not a ratio.

c. an increase in output per hour of workCorrect. This is a ratio of outputs per factor of production.

d. a increase in nominal GDP per worker

Incorrect. This does not net out the effects of inflation.

22. Small differences in the growth rate:

a. can translate into significant differences in the long run.Correct. Small differences will eventually lead to large long run effects due to the effects of compounding.

b. usually make very little difference in the long run.

Incorrect. Small differences will eventually lead to large long run effects due to the effects of compounding.

c. are significant only if they are followed by sustained inflation.

Incorrect. Inflation usually reduces long run economic growth. d. are not significant enough to cause any change in long-run GDPs and can often lead to significant declines in growth.

Incorrect. Small differences will eventually lead to large long run effects due to the effects of compounding.

23. Suppose Ford builds a car plant in Brazil. This is an example of

a. foreign portfolio investment.Incorrect. Portfolio investment refers to ownership without control.

b. foreign direct investment.Correct. Direct investment represents capital goods owned and controlled by the property owner.

c. foreign indirect investment.Incorrect. Indirect investment implies no control by the owner.

d. foreign growth enhancers.Incorrect. This is not a technical term in economic growth analysis.

24. Which of the following would be considered human capital?

a. a robot on an assembly lineIncorrect. This is an example of physical capital.

b. a calculatorIncorrect. This is an example of physical capital.

c. a college educationCorrect. This increases the skill level of a human being.

d. a college classroomIncorrect. This is an example of physical capital.

25. If the political leaders of a country wanted to promote economic growth, which of the following policy alternatives would be most effective?

a. price controls on agricultural products in order to keep the price of food cheapIncorrect. This would reduce incentives to produce agricultural goods.

b. a government program that supported research and development activitiesCorrect. This would raise the productivity of both people and machines.

c. increased trade restraintsIncorrect. This would reduce the benefits of comparative advantage.

d. policies restricting foreign investment in the countryIncorrect. This would reduce the transfer of technological knowledge.

26. According to the traditional view, as the stock of capital rises:

a. the extra output produced from an additional unit of capital decreases.Correct. This is the explanation of the principle of diminishing marginal returns.

b. the extra output produced from an additional unit of capital increases.Incorrect. This is contrary to the principle of diminishing marginal returns.

c. the extra output produced from an additional unit of capital is unchanged.Incorrect. This is contrary to the principle of diminishing marginal returns.

d. the extra output produced from an additional unit of capital first decreases and then increases.Incorrect. This is contrary to the principle of diminishing marginal returns.

27. Greg takes a class to learn web page development. This is an example of investment in

a. physical capital.Incorrect. Physical capital refers to more machines.

b. financial capital.Incorrect. Financial capital are the assets accumulated through saving.

c. human capital.Correct. This is an activity that increases the productivity of a human being.

d.

labor skills.Incorrect. The more correct technical term is human capital.

28. Which of the following is most likely to cause the productivity of labor to increase?

a. higher money wage ratesIncorrect. This would only increase the supply of labor.

b. investment in human and physical capitalCorrect. Both would raise the output level per hour of labor.

c. more flexible working hours and improved retirement plansIncorrect. This may reduce the supply of labor.

d. an increase in the proportion of the work force that belongs to a labor union

Incorrect. This would raise wage rates but not productivity. 29. The four determinants of a country's productivity are:

a. physical capital, human capital, financial capital, and natural resources.Incorrect. Financial capital is not a real resource.

b. financial capital, natural resources, physical capital, and technological knowledge.Incorrect. Financial capital is not a real resource.

c. physical capital, natural resources, technological knowledge, and government fiscal and monetary policies.Incorrect. Fiscal and monetary policies are not real resources.

d. physical capital, human capital, natural resources, and technological knowledge.Correct. This is the correct list of four real factors of production.

30. A nation is more likely to achieve a higher rate of economic growth if it

a. devotes more of its resources to the production of consumption goods.Incorrect. This would reduce saving and investment.

b. reduces the level of investment expenditures.Incorrect. This will reduce capital goods and productivity.

c. imposes high marginal tax rates.Incorrect. This will reduce incentives to invest and produce.

d. allocates a large portion of its resources to research and development.Correct. This will increase the level and productivity of capital goods.

31. Evidence shows that, in general, the larger the level of investment as a share of GDP

a. the smaller the productivity growth rate.Incorrect. More investment means more capital goods and higher production.

b. the greater the productivity growth rate.Correct. More investment means more capital goods and higher production.

c. has no influence whatsoever on the productivity growth rate.Incorrect. More investment means more capital goods and higher production.

d. the greater the inefficient use of scarce resources.

Incorrect. The level of investment does not determine the level of efficiency.

32. Which of the following changes would we expect to result in higher productivity?

a. higher birth ratesIncorrect. This could reduce real GDP per person.

b. a less educated work forceIncorrect. This will reduce the level of output per hour of labor.

c. a decrease in the capital/labor ratioIncorrect. This will reduce the level of output per hour of labor.

d. improved technologyCorrect. This would increase the output of workers and machines.

33. Which of the following will NOT cause labor productivity to increase?

a. new technologyIncorrect. This will cause increased output per hour of labor.

b. increase in human capitalIncorrect. This will cause increased output per hour of labor.

c. increase in physical capitalIncorrect. This will cause increased output per hour of labor.

d. decrease in labor force skillsCorrect. This will decrease the level of labor productivity.

34. Which one of the following would be most likely to improve the standard of living of a poorer country?

a. development of strong labor unionsIncorrect. This will only increase the level of wages not productivity.

b. a sharp increase in the legal minimum wageIncorrect. This will only increase the level of wages not productivity.

c. an increase in expenditures on education and capital investmentCorrect. This will raise the level of output per hour of labor.

d. rapid growth of the money supplyIncorrect. This will have no effect directly on productivity but will increase inflation.

35. Which of the following is generally a serious obstacle to the economic growth of poorer nations?

a. lack of knowledge about modern technologyIncorrect. Knowledge is obtainable through foreign investment.

b. the unavailability of natural resourcesIncorrect. Many poor countries are natural resource rich.

c. a slow rate of population growthIncorrect. Most poor countries have high population growth rates.

d.

a low rate of capital formation as the result of political and economic instabilityCorrect. Capital is expensive and political stability is often hard to achieve.

36. Which of the following is a major obstacle restricting the economic growth of poorer nations?

a. a high rate of capital investmentIncorrect. Poor countries have low rates of investment.

b. inward-oriented policiesCorrect. These reduce the benefits from international trade and foreign investment.

c. political stability and secure property rightsIncorrect. Often poor countries suffer from political instability.

d. investment in human capitalIncorrect. Many poor countries find it difficult to finance education.

37. Which of the following would be most likely to cause real GDP per person of poorer countries to rise?

a. the development of strong labor unionsIncorrect. This will increase wages but not productivity.

b. more rapid population growthIncorrect. This would reduce real GDP per person.

c. investment expenditures that enhance the human capital of labor force participantsCorrect. This would raise the level of output per hour of labor.

d. an international minimum wage lawIncorrect. This will increase wages but not productivity.

38. According to the catch-up effect

a. countries that start off poor tend to grow more rapidly than countries that start off rich.Correct. The benefits to poor countries of learning from richer countries helps poor countries grow more rapidly.

b. countries that start off poor tend to grow less rapidly than countries that start off rich.Incorrect. Poor countries have the opportunity to grow faster due to learning of new technologies.

c. nations with relatively high living standards grow faster than nations with lower living standards.Incorrect. High income countries tend to grow slower than poorer countries.

d. countries that start off rich undertake more investment than countries that start off poor.Incorrect. This would be the opposite of the catch up effect.

39. A production function shows the relationship between:

a. gross domestic product and gross national product.Incorrect. This is not a ratio of inputs and outputs.

b. the quantity of inputs used in production and the quantity of output from production.Correct. A production function is based on the ratio of inputs to outputs.

c. buyers and sellers in an economy.Incorrect. This is a market not a production function.

d. production and spending.

Incorrect. These are the two sides of GDP.

40. You may be richer than John D. Rockefeller in the sense that you have

a. more income due to inflation.Incorrect. John D. Rockefeller had billions even in the early 1900's.

b. more income after taxes.Incorrect. Even though John D. Rockefeller did not pay income taxes until the 1900's, he had a large income even after taxes.

c. more real goods and services.Correct. You benefit from new products and services not available even to billionaires 100 years ago.

d. more financial capital. Incorrect. John D. Rockefeller owned millions of shares in many important companies, especially oil corporations.