SOLUTIONS CHAPTER 10
1.4
Growth Rates
2005
Brazil
Mexico
Thailand
2006
3.69%
4.77
5.11
2007
5.41%
3.29
4.75
2008
5.10%
1.80
5.25
Average Annual
Growth Rate
4.73%
3.29
5.04
a. During 2006, Thailand experienced the highest economic growth rate of 5.11%.
b. During 2007, Brazil experienced the highest economic growth rate of 5.41%.
c. Between 2006 and 2008, Thailand experienced the highest average annual growth rate of
5.04%.
1.6
Year
2004
2005
2006
2007
2008
Real GDP per capita
(2000 prices)
$41,806
42,692
43,425
43,926
43,714
Annual
growth rate
2.12%
1.72
1.15
–0.48
a. The percentage increase in real GDP per capita between 2004 and 2008 was.
 $43,714  $41,806 

  100  4.56%
$41,806


b. The average annual growth rate in GDP per capita between 2004 and 2008 can be measured as
the average of the annual growth rates in the above table, which is 1.126%.
2.1
A movement from A to B shows the effect on real GDP per hour worked of an increase in capital per hour
worked, holding technology constant. A movement from A to C shows the effect of an increase in
technology, holding the quantity of capital per hour worked constant.
2.2
Diminishing returns to capital imply that, holding technology constant, additional capital per hour
worked results in smaller and smaller increases in real GDP per hour worked. Therefore, sustained
increases in real GDP per hour worked require more than continuing increases in capital per hour worked.
To maintain high growth rates despite diminishing returns to capital, economies must experience
technological change.
2.4
Firms are likely to underinvest in research and development because much of the additional
return from the research and development will be gained by other firms. To increase the accumulation of
knowledge capital, governments can protect intellectual property with patents and copyrights, subsidize
research and development, and subsidize education.
4.4
The catch-up effect is that countries with a lower level of GDP per capita will grow faster than
countries with a higher level of GDP per capita. In the table, China’s GDP per capita in 1960 was the
lowest at $448 and its growth between 1960 and 2008 was the highest at an average annual rate of 6.17%,
which is consistent with catch-up. On the other hand, some countries with relatively low GDP per capita
in 1960, such as Uganda and Madagascar, also experienced relatively low growth rates, which is not
consistent with catch-up. Overall, these data are not consistent with the economic growth model’s
prediction of catch-up.
4.5
a. No, this data does not support the catch-up prediction. The countries with the highest initial
levels of real GDP per capita have growth rates of real GDP per capita similar to the countries
with average initial levels of real GDP per capita.
b. Yes, this data supports the catch-up prediction. The countries with the lowest initial levels of
real GDP per capita have the highest growth rates of real GDP per capita, and the countries
with the highest levels of real GDP per capita have the lowest growth rates of real GDP per
capita.
c. No, this data does not support the catch-up prediction. The countries have roughly the same
growth rates of real GDP per capita regardless of their initial levels of real GDP per capita.