Chapter 13
Economic Growth and Productivity
Chapter Summary
1.
Economic growth exists when there is an increase in an economy’s ability to
produce, and/or an increase in its output per capita. An increase in output per
capita means the economy is producing more goods and services per person and
therefore the economy's standard of living is improving.
2.
In the early nineteenth century, economists failed to realize the productivity
benefits derived from technological change. they applied the law of diminishing
return to population growth and projected a decline in output per capita.
Malthus’s predictions were most dismal; rapid population growth would reduce
living standards to a subsistence level.
3.
Neoclassical growth theory focuses upon capital accumulation and the attendant
benefits to output per capita. Increases in the economy's ratio of capital to labor
(known as capital deepening) were perceived as the source of this benefit. This
theory held that capital deepening would cease-and an economy would reach a
steady state-when the rate of return from capital was equal to the real rate of
interest.
4.
U.S. productivity growth slowed during the 1970s and 1980s, returning to the
slower rate that had existed in the early twentieth century. Economists have been
unable to empirically establish the cause of this productivity growth slowdown.
5.
Supply-siders in the 1970s and 1980s proposed tax cuts as a way of increasing
U.S. productivity growth. They contended that lower tax rates for individuals
and businesses would increase saving, investment, and the incentive to work
(which would improve labor productivity).
Important Terms
Capital deepening. An accumulation of capital that results in an increase in the ratio
of capital to labor. Capital-output ratio. The ratio of the economy's stock of capital to
total output.
Capital widening. An increase in capital that is necessary because of increases in
the labor supply; i.e., capital additions are necessary to keep the ratio of capital to
labor constant.
Economic growth. The increase in an economy's ability to produce, as measured by
the absolute or relative increase in GDP or in per capita output over time.
Labor productivity. Labor's output per hour measured by dividing real GDP by the
number of hours worked by labor
Law of diminishing returns. The tendency of incremental output to fall as
additional inputs of a variable resource are used with a fixed quantity of other
economic sources.
Malthusian theory of population. The economy's ability to grow food increases at a
slower rate than the increase in population, resulting in a decreasing standard of
living.
Neoclassical model of economic growth. A model of growth which emphasizes the
importance of capital deepening and technological change.
Output per capita. Total output (GDP) divided by the total population.
Steady state. A situation whereby capital deepening ceases and there is no further
increase in the economy's standard of living.
Supply-side economics.
potential output.
An approach to economic policy which emphasizes
Outline of Chapter 13: Economic Growth and Productivity
13.1
13.1
Concept of Economic Growth
13.2
Population and Economic Growth
13.3
Capital Accumulation and Economic Growth
13.4
The Productivity Growth Slowdown in the United States
13.5
Supply-Side Economics
CONCEPT OF ECONOMIC GROWTH
Economic growth is concerned with the expansion of an economy's ability to
produce (potential gross domestic product) over time. Expansion of potential output
Yp occurs when there is an increase in natural resources R, human resources N, or
capital K, or when there is a technological advance. The two most common measures
of economic growth are an increase in real GDP and an increase in output per capita.
Of these two measures, an increase in output per capita is more meaningful since it
indicates there are more goods and services available per person and hence a rise in
the economy's standard of living. An increase in potential output can be
conceptualized by an outward shift of an economy's production-possibility frontier
(see Chapter 2). In our discussion of economic growth, we shall assume that increases
in potential output are matched by equal increases in spending so that fullemployment growth is assured.
EXAMPLE 13.1. Suppose an economy's production-possibility frontier is curve PP'
in Fig. 13-1; aggregate spending is composed of A1 units of private-sector goods and
B1 units of public-sector goods. Assume that an increase in economic resources shifts
the production-possibility frontier outward to TT'. When the increase in potential
output is matched by an equal increase in aggregate spending, the output of privatesector goods could increase from A1 to A2, while production of public goods
increases from B, to B2.
13.2
POPULATION AND ECONOMIC GROWTH
An increase in the labor supply, ceteris paribus, expands potential output. The
law of diminishing returns shows that the incremental output from an additional labor
input decreases when other economic resources and technology are unchanged. Thus,
the possibility exists that aggregate output could increase while output per capita
decreases. Expecting rapid population growth, economists in the early 19th century
predicted such growth would result in declining output per capita. The predictions of
Thomas Malthus in particular were dismal; he held that the population would
increase at a such a rapid rate that the economy would increasingly be unable to grow
enough food to feed its population; eventually output per capita would fall to a
subsistence level. While technology has allowed highly industrialized countries to
avoid the gloomy projections of early 19th-century economists, rapid population
growth is a problem for many developing countries.
EXAMPLE 13.2. Suppose there is no technological change and non labor economic
resources are unchanged; the labor supply is initially 200 units in period t and
increases 10% during each successive time period; output is initially $1,000,000 and
increases by 5%, 4%, and 3% in successive time periods as a result of increases in the
labor supply. Table 13-1 presents the labor supply and aggregate output over four
successive time periods. Note that output per capita has decreased over the four
periods; the labor supply is obviously increasing faster than aggregate output.
13.3
CAPITAL ACCUMULATION AND ECONOMIC GROWTH
The neoclassical model of economic growth maintains that, in the absence of
technological change, an economy reaches a steady state-a situation in which there
are no further increases in output per capita. In the steady state, capital deepening
ceases, although capital widening may still occur because of growth in the labor
supply. Capital widening exists when capital additions are made to keep the ratio of
capital per worker constant because of increases in the supply of labor Capital
deepening occurs when there is more capital per worker, i.e., there is an increase in
the ratio of capital to labor When there is no technological advance, capital additions
which are capital widening do not change output per worker; however, capital
additions which are capital deepening increase output per worker There is no
population growth in a simplified neoclassical model of growth; thus, all capital
additions are capital deepening and therefore increase output per worker When there
is no change in the labor force, capital additions result in diminishing returns and
have decreased rates of return. Capital additions cease-and the economy reaches a
steady state-when the rate of return from capital additions equals the economy's real
rate of interest. Since there is a limit to capital deepening when there is no change in
technology, there must also be a limit to output per worker and therefore to the
economy's standard of living. An economy's steady-state position can be pushed to a
higher level of output per worker by an increase in its rate of saving, by improved
technology, and/or by better education of its population.
EXAMPLE 13.3. Suppose technology, the labor supply and the quantity of natural
resources are unchanged; the diminishing returns associated with increases in the
stock of capital are represented by curve D1 in Fig. 13-2. Additions to the economy's
stock of capital cease along curve D1 when the capital stock reaches K1 since the rate
of return from capital r1 is equal to the i1 real rate of interest. Once capital stock K1 is
reached, there are no further increases in output per worker and the economy's
standard of living.
EXAMPLE 13.4. Suppose a technological advance shifts the return from capital
curve D1 in Fig. 13-2 rightward to D2. At real interest rate i1 the maximum capital
stock is now K2. Thus, an economy can continuously experience capital deepening
and avoid a steady state-where output per worker no longer increases-as long as there
is technological change.
13.4 THE PRODUCTIVITY GROWTH SLOWDOWN IN THE UNITED
STATES
Productivity is measured by dividing real GDP by the total number of hours worked
by labor Over the past 20 years, the growth Of labor productivity in the United States
has slowed dramatically. Whereas labor productivity-labor's output per hourincreased at an average annual rate of 2.5% between 1948 and 1973, it fell to an
annual rate of 0.704 between 1973 and 1991. Although economists have been unable
to empirically establish the cause of this productivity growth slowdown, a number of
factors appear to be responsible: (1) an increase in environmental regulations, (2)
high energy costs in the 1970s, which resulted in the substitution of more labor and
capital for energy, and (3) a large increase in the number of less skilled workers in the
labor force during the 1970s. Many economists recommend that policies be
implemented which would increase private-sector saving, increase capital
accumulation, and thereby increase output per worker
EXAMPLE 13.5. A productivity growth slowdown has implications for a country's
standard of living. Standard of living is measured by an economy's real GDP per
capita (total output divided by population), whereas productivity is measured as real
GDP per hour of labor input (output divided by the number of hour', worked to
produce this output). Suppose an economy's labor force is always 50% of its
population. Increases in labor's output per hour will result in higher GDP per capita
and therefore raise the economy's standard of living. When output per hour is
unchanged. there will be no increase in output per capita and therefore no
improvement in the economy's standard of living.
13.5
SUPPLY-SIDE ECONOMICS
Concern about the slowdown in U.S. productivity growth during the I 970s
helped popularize the theory of supply-side economies. Supply-siders stressed that
U.S. productivity would be enhanced by actions which promoted incentives to
produce. A decrease in private-sector taxes was proposed. Proponents of this theory
called for a decrease in corporate income tax rates, which would increase corporate
profits and therefore business saving; this in turn would encourage business
investment and capital accumulation. A reduction in the personal income tax rate
would increase the reward from working and promote the work ethic, which is
perceived as a way of increasing labor productivity. Decreased tax rates on interest
income and corporate dividends would increase household saving, which would
result in capital deepening. While not identified as supply-side economics, various
measures have been promoted in the 1990s which would also increase the economy's
ability to produce. Improvement of the U.S. educational system and making job
retraining more readily available would enhance labor skills, increase worker
productivity, and thereby promote economic growth.
EXAMPLE 13.6. In Fig. 13-3, it is assumed that the labor supply and population are
unchanged and that a combination of tax incentives and a better-educated population
shift the aggregate supply curve AS1 rightward to AS2. An increase in the money
supply shifts aggregate demand from AD1 to AD2; the price level remains constant
and output increases from Y1 to Y2 Since there is no change in population, output per
capita has increased with an attending rise in the economy's standard of living.
Solved Problems
CONCEPT OF ECONOMIC GROWTH
13.1.
Explain how the analysis of economic growth differs from the analysis of
equilibrium output in Chapters 7 through 12.
The analysis of equilibrium output focuses upon spending and the
economy's equilibrium level of output when potential output is unchanged.
Thus, the analysis of equilibrium output is short-run. it focuses upon the
necessary change in the money supply, taxes. or government spending to
bring output to its full-employment level. Economic growth analyzes outward
shifts of the production-possibility frontier over time. It takes a longer-term
look at output and evaluates the effect of resource growth upon productive
capacity and the economy's standard of living.
13.2.
Table 13-2 presents growth in real GDP for Country A and Country B. Find
each country's
(a) relative increase in output between 1984 and 1994,
(b) output per capita for 1984 and 1994, and
(c) relative increase in output per capita between 1984 and 1994.
(d) Which measure of economic growth [that which is calculated in (a) or
(b)] is more useful?
(a) The relative increase in output is found by dividing 1994 output by that
for 1984. The relative increase in Country A's real GDP is 2.0
($l,300,000.000/$650,000.000); thus, Country A's real GDP doubled
between 1984 and 1994. The relative increase for Country B is 2.45 for
the same period; B's real GDP more than doubled.
(b) An economy's per capita GDP is found by dividing real GDP by the
economy's population. In Country A, per capita output is $3915.66 in
1984 and $5803.57 in 1994. Country B's per capita output increased
from $3915.66 in 1984 to $4796.67 in 1994.
(c) The relative increase in per capita output between 1984 and 1994 is
found by dividing per capita output in 1994 by that in 1984. The relative
increase in per capita output is 1.48 for Country A and 1.22 for Country
B.
(d) Economic growth is frequently presented as the increase in real GDP.
While useful for some analysis, increases in real GDP do not measure
the economic well-being of individuals in an economy, which is best
measured by increases in per capita output. The calculations in parts (a)
and (c) show how one might reach different conclusions about an
economy's economic growth. Country B's real GDP more than doubled
between 1984 and 1994, while A's only doubled; B obviously has
increased its output at a faster rate than A. On a per capita basis,
however, output per capita increased more rapidly in Country A than B.
Which measure is more useful depends upon one's intent in measuring
growth. When one is only interested in the increase in aggregate output,
growth in real GDP is the relevant measure. However, when the focus is
upon the standard of living in the economy, output per capita is the better
measure of economic growth.
13.3. What is the importance of an increase in output per capita?
An increase in output per capita raises an economy's standard of living.
When there is no change in output per capita. increased output of one good
necessitates decreased output of other goods. Economic growth can eliminate
such need for substitution since it increases the amount of goods and services
produced in an economy.
13.4. Suppose an economy's production possibility frontier is PP' in Fig. 13-4.
(a) Does the production of a combination of net investment and other private
and public sector goods at point B rather than A affect an economy's
growth?
(b) Should a society select point A or B?
(a) Net investment adds to an economy's stock of capital and its productive
capacity. Thus, point B results in greater capital accumulation and is a
position for more rapid economic growth.
(b) In deciding between points A and B. a society is making a decision about
having (1) more private and public sector goods today (point A) or (2)
less today (point B) and more sometime in the future. Point A is selected
when current goods are more valuable to a society than future goods:
point B is selected when a society is willing to sacrifice today for a
higher standard of living in the future.
13.5. What objections, if any, are there to economic growth?
Some economists object to maximizing economic growth because in
doing so it may possibly affect the quality of life, in such ways as pollution of
the environment and waste of natural resources. Maximized economic growth
may also fail to resolve socioeconomic problems or may exacerbate them.
Rapid economic growth through technological change in many instances
increases worker obsolescence (workers no longer have skills needed in the
labor markets), brings about new anxieties and insecurities because of the
potential of obsolescence, and undermines family relationships as the
workplace takes on greater importance than human relationships. Although
attempts are being made to curb pollution, industrial waste is a by-product of
increased output. It therefore can be expected that water, land. and air
pollution will increase with time. Waste of economic resources may also
result when least-cost methods dictate current resource use with little attention
paid to the possible effect that current use may have upon future generations.
And there is no guarantee that growth resolves socioeconomic problems such
as poverty. Poverty in an economy is relative to the economy standard of
living. Thus, growth does not resolve the problem of relative poverty, which
is only resolved by a redistribution of current income.
POPULATION AND ECONOMIC GROWTH
13.6.
In the early 19th century, Thomas Malthus theorized that population would
increase at a rate faster than the economy's ability to produce food.
(a) Use the law of diminishing returns to explain Malthus's position.
(b) What does Malthus's theory of population suggest about living standards
for an economy?
(c) Might it be possible to postpone Malthus's dismal predictions'?
(a) The incremental output of food per labor input falls when additional
labor units are added to a fixed amount of land, given no change in
technology. With the marginal output of food declining, rapid population
growth would exceed increases in the production of food. and the
average output of food per worker would decline.
(b) When the average output of food per worker falls. each individual will
have decreasing quantities of food over time. Lower-income individuals
will be pushed toward a subsistence diet; starvation will eventually
check the population expansion and leave lower-income individuals at
the subsistence level.
(c) Malthus's application of the law of diminishing returns to the production
of food assumes a constant state of technology and no increase in
resources other than population. If farmable land increases in proportion
to the growth of population. food output should increase proportionately
and there should be no decrease in average farm output. On the other
hand, new technology. such as crop rotation and fertilizers. would
increase the productivity of land and raise the average output of food per
unit of labor input. Thus. the postponement of Malthus's dismal
prediction depends upon technological advance occurring more rapidly
than population growth.
13.7.
An average output-per-capita curve is presented in Fig. 13-5, holding constant
technology and non labor economic resources.
(a) why is p1 the economy’s optimum population?
(b) what happens to the optimum population when there is a technological
advance and/or an increase in non labor economic resources?
(a) P1 is the economy's optimum population: to the left of P1 output per
capita rises as population increases; to the right of P1 output per capita
falls as population increases. Thus output per capita is at its maximum-as
is the economy's standard of living-when population is P1.
(b) The output curve shifts upward and to the right when there are
technological advances and/or increases in non labor economic
resources. Thus, the optimum population occurs at a population size
greater than P1, and output per capita can exceed S1.
13.8.
Suppose an economy has a population of P2 and the average output-per-capita
curve is L' in Fig. 13-6.
(a) Does this economy have an optimum population and maximum standard
of living?
(b) Suppose there is technological advance which shifts the output per capita
curve upward to L" and the population increases to P4. Has there been an
increase in the economy's standard of living?
(c) What can this economy do to increase its standard of living?
(a) Population P2 exceeds the economy's optimum population for outputper-capita curve L'. Thus, output per capita is S1 rather than S2, which
would exist at population P1 along curve L'.
(b) Output per capita is still S1 for output curve L" when the population is
P4. Although advances have been made in technology, no change has
occurred in the economy's standard of living because of the large
increase in the economy's population.
(c) There is a need to limit population growth. If the increase in population
was P3, output per capita would have risen to S3 and the economy's
standard of living would have improved.
13.9.
Why is rapid population growth a deterrent to economic growth for a
developing country?
Many developing countries can be characterized as follows: a large
percentage of their economic resources is devoted to the production of food;
the labor force is largely unskilled, and illiteracy is widespread; many families
are at or near a subsistence standard of living; capital is scarce; there is
considerable malnutrition and disease and a high infant-mortality rate. Given
these characteristics, the output-per-capita curve in Fig. 13-5 shifts upward
slowly over time. But when these characteristics are combined with rapid
population growth, output per capita may fail to rise and might even fall.
Slower population growth is necessary, as are larger upward shifts of the
output-per-capita curve, which can he achieved through education (increases
in labor skills), better nutrition (improvement in labor productivity), capital
accumulation, and adoption of modern farming techniques such as crop
rotation, fertilization, and hybrid seeds.
CAPITAL ACCUMULATION AND ECONOMIC GROWTH
13.10. (a)
What is meant by capital accumulation?
(b) When does capital accumulation result in capital widening and capital
deepening?
(c) Does capital widening or capital deepening result in an increase in the
economy's standard of living?
(a) Capital accumulation occurs when an economy adds to its stock of
capital. For example, the economy has more machines and factories
available to produce goods and services.
(b) Capital widening exists when more capital is needed to support increases
in the economy's labor supply For example. suppose an economy's real
capital is $100,000 and there are 100 people in the labor supply. The
economy's capital-labor ratio is $1000; each worker has $1000 in capital
to work with. When 20 additional people enter the labor force, capital
must increase $20,000 to maintain the existing capital-labor ratio-thus.
there is capital widening. Capital deepening occurs when the capitallabor ratio increases. The ratio of capital to labor is $1000 when the
capital stock is $100,000 and there are 100 people in the labor supply.
An increase in the stock of capital to $11 0.000, with no change in the
labor force, increases the ratio of capital to labor to $1 100-thus, there is
capital deepening.
(c) Capital widening maintains labor productivity since labor has the same
amount of capital to work with and there is no change in per capita
output. Capital deepening increases labor productivity since labor works
with increasing amounts of capital. Thus, capital deepening, caused by
increases in the capital-labor ratio, raises labor productivity and output
per capita, which results in a higher standard of living.
13.11. The incremental returns associated with increases in the economy's stock of
capital are shown by curve D1 in Fig. 13-7 for Country A; along curve D1 the
labor force, labor skills, and technology are unchanged.
(a) Is there any need for this economy to widen its stock of capital?
(b) Suppose the economy's initial capital stock is K1. What is this economy's
maximum stock of capital when the real rate of interest is it?
(c) What happens to the economy's standard of living when the maximum
capital stock is reached. with other resources and technology unchanged?
(d) What is meant by a steady state?
(a) There is no need for capital widening since the labor supply is
unchanged.
(b) An economy reaches its maximum capital stock when the rate of return
from capital equals the real rate of interest. The rate of return from
capital stock K1 in Fig. 13-7 is r2 which exceeds the real rate of interest
i1. Thus, there is capital deepening until the capital stock reaches K2,
which is the economy's maximum stock of capital.
(c) Capital deepening increases labor productivity and therefore the
economy's standard of living. Once the maximum capital stock is
reached, there are no further increases in the economy's standard of
living.
(d) A steady state is a situation where there is no further capital deepening
and therefore no improvement In an economy's standard of living.
13.12. What can a country do to improve its standard of living when it has reached a
steady state?
There are a number of measures that a country can take to increase its
standard of living. One approach would be to encourage private-sector saving.
Further capital deepening will occur when increased saving lowers the
economy's real rate of interest. Labor productivity is enhanced by improving
labor skills; this can be achieved by training and various educational
programs. Labor productivity also increases when there is greater worker
motivation and technological advance. Thus, it is unlikely that an economy
will reach a steady state unless technological change ceases and it becomes
impossible to improve the skills of the labor supply.
THE PRODUCTIVITY GROWTH SLOWDOWN IN THE UNITED STATES
13.13. (a) How is productivity measured?
(b) Does an increase in labor productivity mean that increased output is due
to the efforts of labor?
(c) Why are increases in labor productivity important?
(a) Productivity is measured by relating the number of hours worked by
labor to produce output. Thus, productivity measures the output per hour
of labor input.
(b) Increased labor productivity could be the result of a more highly
motivated labor force or a better-educated one which produces more
output per hour. Greater output per hour could also be the result of
capital deepening or technological advance. Thus. while productivity is
measured in terms of labor inputs, increases in productivity may be the
result of factors other than the labor force.
(d) Increases in labor productivity are the basis for increasing labor's real
wage and therefore its standard of living. Productivity increases also
allow for a shorter workweek and more vacation time. Thus, quality of
life can be enhanced by increased productivity.
13.14. Increases in labor productivity in the united States over 10-year intervals are
presented in Table 13-3. What has been happening to increases in U.S.
productivity during the 20th century?
Continuous increases occurred in the growth of labor productivity each
decade until a peak was reached during the decade of 1940-1 950.
Improvements in labor productivity remained high from 1950 to 1970 but
slowed in the 1970s and 1980s. Concern about increases in U.S. productivity
focuses upon the 1970-1990 period because it represents one of the slowest
periods of productivity growth during the 20th century.
SUPPLY-SIDE ECONOMICS
13.15. What factors contribute to economic growth?
An economy's potential output depends upon its natural and human
resources, stock of capital, and technological capability. An economy's
natural resources are relatively fixed and not a major source of increased
productive capacity over time. Since some of these natural resources, such as
petroleum deposits, maybe undiscovered, they are a source of economic
growth when they are found. An increase in the economy's labor force and/or
in the number of hours worked per week expands an economy's productive
capacity as does improvement in the educational level and skills of an existing
labor force. Capital accumulation, where the number of machines and
factories is increased, is a key element to the growth process. Through capital
accumulation an economy is able to use capital (e.g., a machine) rather than
labor to manufacture goods. By substituting capital for labor, productive
capacity is enhanced since labor resources are then available to produce other
goods and services. Technology is the development and application of new
knowledge to enhance the productive process. It may involve investment in
new and more efficient machinery or more effective ways of combining
existing resources.
13.16. What economic measures did the proponents of supply-side economics
promote in the 1970s and 1980s?
Supply-siders during the 1970s and 1980s advocated cutting various
private-sector tax rates; in their judgment, a burdensome tax system
undermined an economy's potential output. High taxes in the United States
were seen as undermining saving, and business investment. and people's
desire to work and innovate. A high income tax rate was believed to
discourage saving since it lowers the reward for saving. For example. a 5%
return on saving is only 2.5% when an individual pays a 50% effective
income tax rate to federal, state, and local governments. When high tax rates
discourage saving, there is less investment and capital deepening and slower
productivity growth. A high personal income tax rate and a readily available,
poorly monitored welfare system can undermine personal motivation. A
highly progressive income tax structure means that individuals rapidly move
to higher and higher income tax brackets as a result of success in the
workplace. Supply-siders viewed such a tax structure as a disincentive to
succeed since, on an after-tax basis, success is not adequately compensated.
And a poorly monitored but generous welfare system can act as a disincentive
to less-skilled workers who may seek welfare relief rather than improve skills
and become productive members of the labor force. Thus, supply-siders
hoped to reverse the productivity slowdown that had taken place in the United
States by cutting taxes and reversing what they believed were disincentives to
work and save.
13.17. What economic measures are being promoted in the 1990s to increase
economic growth?
The 1990s have emphasized worker training and employment,
elimination of workplace discrimination, and improvement of elementary and
secondary education. Worker training and employment are viewed as ways of
making the labor markets become more efficient. Some workers in the labor
markets are not productive because their skills are not currently sought
(workers' skills may become obsolete because of changing demand patterns or
technological advance) or they did not develop adequate skills while still in
school. Retraining such workers provides them with marketable skills and
obviously increases their productivity. Workplace discrimination slows
productivity growth. When discrimination is absent, the best- and more
productive-worker is hired; when discrimination exists, a less-qualified
worker may be hired because of religion, gender, color. or ethnic origin,
which is an obvious deterrent to productivity. Better educated workers are
also more productive. They can read and follow directions, think
constructively, and offer suggestions for improving production techniques;
also, they have self-confidence, which is essential for high worker
performance.
Multiple Choice Questions
1.
There is an increase in the economy's potential output when there is
(a) an increase in government spending,
(b) a decrease in government spending,
(c) an increase in the economy's capital stock,
(d) an increase in the economy's depreciation rate.
2.
There is an increase in output per capita when a 10% increase in the population
is associated with a
(a) 10% increase in output,
(b) 20% increase in output,
(c) 10% increase in the capital stock,
(d) 5% increase in output.
3.
According to the law of diminishing returns, continuous increases in population
size with no change in other resources or technology
(a) eventually result in an increase in real output per capita,
(b) eventually result in a decrease in real output per capita,
(c) have no effect upon an economy's ability to produce food,
(d) eventually increase an economy's ability to produce food.
4.
According to Malthusian population theory, in the long run output per capita
(a) tends toward the subsistence level,
(b) increases at an increasing rate,
(c) increases at a decreasing rate,
(d) does not increase.
5.
Capital deepening occurs when there is
(a) an increase in the stock of capital,
(b) an equal increase in the stock of capital and the labor supply,
(c) a greater increase in the labor supply than in the stock of capital,
(d) a greater increase in the stock of capital than in the labor supply.
6. Capital deepening ceases
(a) as a result of population growth,
(b) when there is no additional increase in the population,
(c) when the rate of return from capital is equal to the real rate of interest,
(d) when the real rate of interest falls, ceteris paribus.
7. Labor productivity in the United States
(a) was unchanged during the 1970s and 1980s,
(b) was increasing at a faster rate in the 1980s than in the 1930s,
(e) increased at a slower rate in the 1970s than in the 1960s,
(d) increased at a faster rate in the 1970s than in the 1960s.
8.
9.
Which of the following does not result in an increase in output per capita?
(a) Capital widening,
(b) Capital deepening,
(c) Technological advance.
(d) Better-educated workers.
Which of the following proposals would not be supported by supply-side
economists?
(a) A decrease in the personal income tax rate,
(b) Improved welfare benefits,
(c) A decrease in the capital gains tax rate,
(d) A decrease in the corporate income tax rate.
10. Which of the following proposals would increase labor productivity?
(a) Improve the educational system,
(b) Reduce job discrimination,
(c) Retrain workers,
(d) All of the above.
True or False Questions
11. An economy's standard of living is rising when real GDP is increasing 10%
while population is increasing 5%.
12. Assuming full employment of resources, an increase in the labor force, ceteris
paribus, increases output.
13. Assuming full employment of resources, an increase in the labor force, ceteris
paribus, always increases output per capita.
14. Malthus's theory of population maintained that population growth would
eventually push the economy's living standard to the subsistence level.
15. Capital deepening ceases when the real rate of return from capital equals the real
rate of interest.
16. Additions to the economy's stock of capital always result in capital deepening
and capital widening.
17. Labor productivity is found by dividing output by the number of workers in the
labor force.
18. Supply-siders in the 1980s advocated government-sponsored retraining
programs.
19. Supply-side policies aim at increasing the economy's ability to produce.
20. The slowdown in U.S. productivity growth was caused by capital widening.
Answers to Multiple Choice and True or False Questions:
1.
(c)
6.
(c)
11.
(T)
16.
(F)
2.
(b)
7.
(c)
12.
(T)
17.
(F)
3.
(b)
8.
(a)
13.
(F)
18.
(F)
4.
(a)
9.
(b)
14.
(T)
19.
(T)
5.
(d)
10.
(d)
15.
(T)
20.
(F)