Economic Growth
CHAPTER SEVENTEEN
ECONOMIC GROWTH
ANSWERS TO END-OF-CHAPTER QUESTIONS
17-1
What are the four supply factors of economic growth? What is the demand factor? What is the
efficiency factor? Illustrate these factors in terms of the production possibilities curve.
The four supply factors are the quantity and quality of natural resources; the quantity and quality
of human resources; the stock of capital goods; and the level of technology. The demand factor
is the level of purchases needed to maintain full employment. The efficiency factor refers to
both productive and allocative efficiency. Figure 17.1 illustrates these growth factors by
showing movement from curve AB to curve CD.
17-2
What is the relationship between a nation’s production possibilities curve and its long-run
aggregate supply curve? How does each relate to the idea of a New Economy?
The supply factors that shift the production possibilities curve outward and explain economic
growth are the same factors that shift its long-run aggregate supply curve rightward. This is
shown in Figure 17.2 in the text.
The notion of a New Economy is that projected growth in productivity and output have increased
above what the U.S. experienced from 1973-1995. Increases in productivity and the
corresponding increases in output would be demonstrated by shifting the production possibilities
curve outward and by shifting the aggregate supply curve rightward. With a New Economy, the
curves would shift out at a faster pace than before.
17-3
Suppose that Alpha and Omega have identically sized working-age populations, but that annual
hours of work are much greater in Alpha than in Omega. Provide two possible explanations.
One explanation might be that Omega’s labor force is underemployed, producing at a point
inside the production possibilities curve. Another explanation could be that the two populations
have different attitudes and preferences about work and leisure with Omega workers placing a
higher value on leisure than those in Alpha.
17-4
Suppose that work-hours in New Zombie are 200 in year 1 and productivity is $8. What is New
Zombie’s real GDP? If work hours increase to 210 in year 2 and productivity rises to $10, what
is New Zombie’s rate of economic growth?
NZ’s GDP in year 1 is $1600; GDP in year 2 is $2100.
Rate of growth is (2100-1600)/1600 or .3125 =31.25% (assumes constant prices)
17-5
To what extent have increases in U.S. real GDP resulted from more labor inputs? From higher
labor productivity? Rearrange the following contributors to the growth of real GDP in order of
their quantitative importance: economies of scale, quantity of capital, improved resource
allocation, education and training, technological advance.
Both labor force growth and labor productivity growth have been important sources of real GDP
growth. Their relative contribution has varied over time (the quantity of labor contributed just
over half of the growth from 1973-1990), but most recently (1995-2004), about 75 percent of
U.S. growth is attributed to productivity growth, and it is projected to contribute around 70
percent from 2004 to 2010. Factor importance in descending order: (1) Technological
204
Economic Growth
advance—the discovery of new knowledge that results in the combining of resources in more
productive ways. (2) The quantity of capital. (3) Education and training. (4) Economies of
scale and (5) improved resource allocation.
205
Economic Growth
17-6
True or false? If false, explain why.
a. Technological advance, which to date has played a relatively small role in U.S. economic
growth, is destined to play a more important role in the future.
b. Many public capital goods are complementary to private capital goods.
c. Immigration has slowed economic growth in the U.S.
(a) The first part is false because technology has played the most important role in U.S.
economic growth of any growth factor. However, the second part of the statement is
probably true.
(b) True.
(c) False; immigration has been a source for an expanded labor force and also for expansion in
aggregate demand.
17-7
Explain why there is such a close relationship between changes in a nation’s rate of productivity
growth and changes in its average real hourly wage.
Real hourly wage average represents the average purchasing power of the wage each worker
receives. Purchasing power refers to the amount of output that can be obtained with that wage.
If output per worker is not increasing, then the amount of output available per capita for workers
to buy will not be growing either. In other words the “real” wage changes only if there is an
increase in productivity. Nominal wages don’t represent purchasing power.
The real wage or income of a person stranded on a desert island (Robinson Crusoe?) is whatever
they are able to produce.
17-8
Relate each of the following to the recent productivity speedup:
a. Information technology
b. Increasing returns
c. Network effects
d. Global competition
Each of the above has and continues to play a role in the productivity speedup. The rate of
productivity growth has grown substantially due to innovations using microchips, computers,
new telecommunications devices and the Internet. All of these innovations describe features of
what we call information technology, which connects information in all parts of the world with
information seekers. New information products are often digital in nature, and can be easily
replicated once they have been developed. The start-up cost of new firms and new technology is
high, but expanding production has a very low marginal cost, which leads to economies of scale
– firms’ output grows faster than their inputs. Network effects refer to a type of economy of
scale whereby certain information products become more valuable to each user as the number of
buyers grows. For example, a fax machine is more useful to you when lots of other people and
firms have one; the same is true for compatible word-processing programs. Global competition
is related to the speedup because both transportation and communication can be accomplished at
much lower cost and faster speed than previously which expands market possibilities for both
consumers and producers who are not very limited by national boundaries today.
206
Economic Growth
17-9
Provide three examples of products or services that can be simultaneously consumed by many
people. Explain why labor productivity greatly rises as the firm sells more units of the product or
service, and explain why the higher level of sales greatly reduces the per-unit cost of the product.
Text examples include films, CD entertainment, television programs, software programs, and
Internet information. Labor productivity rises with some of these products when they are used as
inputs because sharing compatible software programs, Internet information and the same video
training programs, for example, can expand output potential for many workers who benefit from
the effects of using or learning from the information simultaneously.
Production of information goods has a high start-up or development cost, but additional units can
be produced at little or no cost. Therefore, as more units are produced, the denominator rises,
but the total cost won’t rise much and the cost per unit, therefore, will fall.
17-10 Productivity often rises during economic expansions and falls during economic recessions. Can
you think of reasons why? Briefly explain. (Hint: Remember that the level of productivity
involves both levels of output and levels of labor input.)
Productivity would be likely to rise during economic expansions because the low rate of
unemployment would encourage the more intensive use of existing plant and equipment and
current workforce. Worker productivity would be likely to fall during recessions because
employers would be reluctant to discharge valuable workers until absolutely necessary.
17-11 Do you think the high-income nations such as the United States should eliminate tariffs on
imports from the world’s poorest nations as a way to help them improve their standard of living?
Why or why not? Do you think high-income nations should forgive the debt of poor nations to
help them develop? How much in tax payments would you be willing to personally provide each
year for such debt relief?
Student opinions will vary, depending mainly on what they have heard about the issue. Those
influenced by stories of sweatshops and child labor may oppose policies that would expand that
trade. Others may oppose tariffs because they think it will hurt domestic workers (addressed in
chapter 18). Others still may be concerned about the overextraction of resources in low income
nations and adverse environmental consequences from promoting that trade. If they follow the
presentation in the text, however, they will view trade more as an engine of growth for low
income nations (assuming trade income isn’t siphoned off by corrupt governments), and thus
would support the elimination of tariffs.
Debt forgiveness to the poorest nations may allow them to devote these interest payments to
needed social programs – especially investment in human capital programs like education.
Countries requesting forgiveness could be required to submit a plan for using these funds for
productive purposes before the debt is forgiven. Debt relief might reduce incentives for careful
borrowing and saving for future growth. If countries believe loans are gifts, it might encourage
reckless spending.
The answer to the last question is based on personal views, but students should realize that the
U.S. currently grants $10-14 billion per year in total foreign aid or about $40 per person per year.
207