© 2013 Pearson
Economic Growth
25
CHECKPOINTS
© 2013 Pearson
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Checkpoint 25.1
Checkpoint 25.3
Problem 1
Problem 1
Problem 2
Problem 2
Problem 3
In the news
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Checkpoint 25.4
Problem 1
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Problem 2
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Problem 3
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In the news
Problem 4
Checkpoint 25.2
Problem 5
Problem 1
In the news
Problem 2
In the news
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CHECKPOINT 25.1
Practice Problem 1
Mexico’s real GDP was 8,762 billion pesos in 2010 and 9,105
billion pesos in 2011.
Mexico’s population growth rate in 2011 was 1 percent.
Calculate Mexico’s economic growth rate in 2011 and the
growth rate of real GDP per person in Mexico in 2011.
© 2013 Pearson
CHECKPOINT 25.1
Solution
The economic growth rate equals the percentage change in
real GDP:
[(Real GDP in 2011 – Real GDP in 2010)
÷ Real GDP in 2010] x 100.
When we substitute the numbers, Mexico’s economic
growth rate equals
[(9,105 billion – 8,762 billion) ÷ 8,762] x 100.
Mexico’s economic growth rate in 2011 was 3.9 percent.
© 2013 Pearson
CHECKPOINT 25.1
Growth rate of real GDP per person equals the growth
rate of real GDP minus the population growth rate.
When we substitute the numbers,
Growth rate of real GDP per person = (3.9 – 1) percent,
which is 2.9 percent.
The growth rate of real GDP per person in Mexico in
2011 was 2.9 percent.
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CHECKPOINT 25.1
Practice Problem 2
Calculate the approximate number of years it will take for
real GDP per person to double if an economy maintains
an economic growth rate of 12 percent a year and a
population growth rate of 2 percent a year.
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CHECKPOINT 25.1
Solution
The growth rate of real GDP per person equals the
economic growth rate minus the population growth rate.
Real GDP per person grows at (12 – 2) percent a year,
which is 10 percent a year.
The Rule of 70 tells us that the level of a variable that
grows at 10 percent a year will double in 70 ÷ 10 years,
or 7 years, if the growth rates are maintained.
It will take 7 years for real GDP per person to double.
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CHECKPOINT 25.1
Practice Problem 3
Calculate the change in the number of years it will take for
real GDP per person in India to double if real GDP per
person increases from 8 percent a year to 10 percent a
year.
© 2013 Pearson
CHECKPOINT 25.1
Solution
The Rule of 70 tells us that a variable that grows at
8 percent a year will double in 70 ÷ 8 years, which is
approximately 9 years.
By increasing its growth rate to 10 percent a year, the
variable will double in 7 years.
Real GDP per person in India will two years earlier.
© 2013 Pearson
CHECKPOINT 25.1
In the news
ADB reduces China’s growth estimate
Since 1980, China’s real GDP per person has grown at 10
percent per year. The Asian Development Bank (ADB) cut
its estimate for China’s growth to 9.3 percent this year.
Source: Bloomberg, September 13, 2011
If China’s growth rate remains at 9.3 percent a year, how
many additional years will it take for China to double its
real GDP per person?
© 2013 Pearson
CHECKPOINT 25.1
Solution
With a growth rate of 10 percent a year, real GDP per
person will double in 7 years (70 ÷ 10),
If the growth rate is maintained at 9.3 percent a year, real
GDP per person will double in 7.5 years (70 ÷ 9.3).
It will take an additional 0.5 years for real GDP per
person to double.
© 2013 Pearson
CHECKPOINT 25.2
Practice Problem 1
The table provides some data for an economy in 2009 and
2010.
Calculate the growth rate of real GDP in 2010.
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CHECKPOINT 25.2
Solution
Growth rate of real GDP in 2010 equals
(Real GDP in 2010 – Real GDP in 2009) ÷ Real GDP in
2009 x 100
= ($1,050 – $1,000) ÷ $1,000) x 100 = 5 percent.
© 2013 Pearson
CHECKPOINT 25.2
Practice Problem 2
The table provides some data for an economy in 2009 and
2010.
Calculate the labor productivity in 2009 and 2010.
Calculate the growth rate of labor productivity in 2010.
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CHECKPOINT 25.2
Solution
Labor productivity equals real GDP per hour of labor.
In 2009, labor productivity = $1,000 ÷ 25 = $40.00 an hour.
In 2010, labor productivity = $1,050 ÷ 25.6 = $41.02 an
hour.
Labor productivity growth rate = (41.02 – 40.00) ÷ 40.00 x
100 = 2.55 percent.
© 2013 Pearson
CHECKPOINT 25.2
In the news
Labor productivity on the rise
The BLS reported the following data for the year to June
2011: In the nonfarm sector, output increased by 2.4 percent
as aggregate hours increased 1.6 percent; in the
manufacturing sector, output increased 4.6 percent as
aggregate hours increased by 2.1 percent.
Source: bls.gov/news.release
As aggregate hours increased, output increased, but did
labor productivity in each sector increase? In which sector
was growth in labor productivity greater?
© 2013 Pearson
CHECKPOINT 25.2
Solution
Output = Aggregate hours × Labor productivity.
In each sector, output increased by more than the increase
in aggregate hours, so labor productivity must have
increased.
Output growth in the manufacturing sector was almost
double that in the nonfarm sector while growth of aggregate
hours was approximately the same, so labor productivity
must have increased by a larger percentage in
manufacturing than in the nonfarm sector.
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CHECKPOINT 25.3
Practice Problem 1
What is the classical growth theory and why does it say that
economic growth will eventually end?
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CHECKPOINT 25.3
Solution
The classical growth theory predicts that labor productivity
growth is temporary:
When labor productivity increases, real GDP per person
increases and because it exceeds the real income needed to
maintain life, a population explosion occurs.
The population becomes so large that capital per worker and
labor productivity decrease and real GDP per person returns
to its subsistence level.
© 2013 Pearson
CHECKPOINT 25.3
Practice Problem 2
What is the driving force of economic growth according to
new growth theory? Why does it predict that the economic
growth will never end?
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CHECKPOINT 25.3
Solution
The driving force of economic growth according to new
growth theory is a persistent incentive to innovate and an
absence of diminishing returns.
New growth theory predicts that economic growth will
never end because our unlimited wants will lead us to
make choices that will bring ever-greater productivity and
perpetual economic growth.
© 2013 Pearson
CHECKPOINT 25.3
Study Plan Problem
What is the driving force of economic growth according
to new growth theory?
A.
B.
C.
D.
Advancements in medical research.
The pursuit of leisure.
Religion
Productive activities that can be replicated with no
diminishing returns.
E. Foreign investment.
© 2013 Pearson
CHECKPOINT 25.3
In the news
The productivity watch
Former Federal Reserve chairman Alan Greenspan
attributes the growth of labor productivity to IT investments
that boosted labor productivity, which boosted company
profits, which led to more IT investments, and so on, leading
to a nirvana of high growth.
Source: Fortune Magazine, September 4, 2006
Which of the growth theories that you’ve studied in this
chapter best corresponds to the explanation given by Mr.
Greenspan?
© 2013 Pearson
CHECKPOINT 25.3
Solution
Mr. Greenspan is describing the new growth theory.
According to this theory, the endless pursuit of profit leads to
innovations (IT innovations in the period described here) that
increase labor productivity, shift the production function
upward, increase the demand for labor, raise the real wage
rate, and increase profit.
The perpetual pursuit of profit will bring persistent economic
growth.
© 2013 Pearson
CHECKPOINT 25.4
Practice Problem 1
What are the preconditions for economic growth?
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CHECKPOINT 25.4
Solution
The preconditions for economic growth are economic
freedom, private property rights, and markets.
Without these preconditions, people have little incentive
to undertake the actions that lead to economic growth.
© 2013 Pearson
CHECKPOINT 25.4
Study Plan Problem
What are the preconditions for economic growth?
A.
B.
C.
D.
E.
Entrepreneurial spirit and low unemployment.
A large standing army and small government.
A small government and property rights.
Low unemployment and a large standing army.
Economic freedom, private property rights, and
markets.
© 2013 Pearson
CHECKPOINT 25.4
Practice Problem 2
Why does much of Africa experience slow economic
growth?
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CHECKPOINT 25.4
Solution
Some African countries experience slow economic
growth because they lack economic freedom, private
property rights are not enforced, and markets do not
function well.
People in these countries have little incentive to
specialize and trade or to accumulate both physical
and human capital.
© 2013 Pearson
CHECKPOINT 25.4
Study Plan Problem
Why does much of Africa experience slow economic
growth?
A.
B.
C.
D.
It lacks motivation to grow.
It lacks aid from developed countries.
It lacks natural resources and labor.
It lacks economic freedom, private property rights that
are enforced, and markets that function well.
E. It lacks UN assistance.
© 2013 Pearson
CHECKPOINT 25.4
Practice Problem 3
Why is economic freedom crucial for achieving
economic growth?
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CHECKPOINT 25.4
Solution
Economic freedom is crucial for achieving economic
growth because economic freedom allows people to
make choices and gives them the incentives to pursue
growth-producing activities.
© 2013 Pearson
CHECKPOINT 25.4
Study Plan Problem
Why is economic freedom crucial for economic
growth?
A. It gives the incentive to save, invest, expand human
capital, and discover and apply new technologies.
B. It protects workers’ rights and prevents unfair firing.
C. It upholds democracy, which is essential if an economy
is to grow.
D. Only good government can make the right investment
decisions.
E. It ensures that the majority of citizens make the most
important decisions.
© 2013 Pearson
CHECKPOINT 25.4
Practice Problem 4
What role do property rights play in encouraging
economic growth?
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CHECKPOINT 25.4
Solution
Clearly defined property rights and a legal system to
enforce them give people the incentives to work, save,
invest, and accumulate human capital.
© 2013 Pearson
CHECKPOINT 25.4
Study Plan Problem
What role do property rights play in encouraging
economic growth?
A. They increase the penalty for theft.
B. The give governments the power to acquire property in
the public interest.
C. They create more equality of income.
D. They strengthen the incentive to work, save, invest,
and accumulate human capital.
E. They ensure that debts are always paid.
© 2013 Pearson
CHECKPOINT 25.4
Practice Problem 5
Explain why, other things remaining the same, a
country with a well-educated population has a faster
economic growth rate than a country that has a poorly
educated population.
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CHECKPOINT 25.4
Solution
A well-educated population has more skills and a
greater labor productivity than a poorly educated
population.
A well-educated population can contribute to the
research and development that create new technology.
© 2013 Pearson
CHECKPOINT 25.4
Practice Problem 6
India’s economy hits the wall
Just six months ago, the Indian economy was growing
rapidly; now growth has halted. India needs to spend
$500 billion upgrading its infrastructure and education
and health-care facilities. Agriculture remains
unproductive; and reforms, like strengthening the legal
system, have been ignored.
Source: BusinessWeek, July 1, 2008
Explain how the measures reported in the news clip
could lead to faster economic growth in India.
© 2013 Pearson
CHECKPOINT 25.4
Solution
Investment in infrastructure and education and heath-care
facilities would increase India’s stock of physical capital,
which would increase labor productivity.
Better education and heath care would increase human
capital and again increase labor productivity.
With better technology and more capital used on farms,
productivity of farm workers would increase.
Strengthening the legal system could better enforce
property rights.
These measure could lead to faster growth in labor
productivity and faster growth in real GDP per person.
© 2013 Pearson