Chapter 25
Production and Growth
TRUE/FALSE
1. If per capita real income grows by 2 percent per year, then it will double in approximately 20 years.
ANS: F DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
2. Over the period 1870-2006, the United States experienced an average annual growth rate of real GDP per
person of about 4 percent per year.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
3. In 2006, income per person in the United States was about 12 times that in India.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
4. Over the period 1900-2006, Brazil’s rate of economic growth exceeded that of China.
ANS: T DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
5. If a country has a higher level of productivity than another, then it also has a higher level of real GDP.
ANS: F DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Productivity
MSC: Analytical
6. International data on real GDP per person give us a sense of how standards of living vary across countries.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Real GDP
MSC: Definitional
7. Real GDP per person in rich countries, such as Germany, is sometimes more than 10 times that of poor
countries like Pakistan.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Standard of living
MSC: Definitional
8. Both the standard of living and the growth of real GDP per person vary widely across countries.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth
TOP: Standard of living | Real GDP MSC: Definitional
9. If they could increase their growth rates slightly, countries with low income would catch up with rich
countries in about ten years.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth
TOP: Economic growth | Catch-up effect MSC: Interpretive
147
148 Chapter 25 /Production and Growth
10. In the United States real GDP per person is about $44,000, while in some poor countries real GDP per person
is less than $3,000.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
11. Although growth rates across countries vary some, rankings of countries by income remain pretty much the
same over time.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
12. International data on the history of real GDP growth rates shows that over the last 100 years or so, rich
countries got richer and poor countries got poorer.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
13. Productivity can be computed as number of hours worked divided by output.
ANS: F DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Productivity
MSC: Definitional
14. Indonesians, for example, have a lower standard of living than Americans because they have a lower level of
productivity.
ANS: T DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive
15. If Country A produces 6,000 units of goods and services using 600 hours of labor, and if Country B produces
5,000 units of goods and services using 450 units of labor, then productivity is higher in Country B than in
Country A.
ANS: T DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Productivity
MSC: Applicative
16. Like physical capital, human capital is a produced factor of production.
ANS: T DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Physical capital | Human capital MSC: Interpretive
17. Human capital is the term economists use to refer to the knowledge and skills that workers acquire through
education, training, and experience.
ANS: T DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Human capital
MSC: Definitional
18. A forest is an example of a nonrenewable resource.
ANS: F DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Natural resources
MSC: Definitional
19. Historical trends in the prices of most natural resources compared to prices of other goods indicate that natural
resources have become scarcer over time.
ANS: F DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Natural resources
MSC: Interpretive
Chapter 25 /Production and Growth 149
20. It is possible for a country without a lot of domestic natural resources to have a high standard of living.
ANS: T DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Natural resources | Standard of living MSC: Interpretive
21. Constant returns to scale is the point on a production function where increasing inputs will no longer increase
output.
ANS: F DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Constant returns to scale
MSC: Interpretive
22. As capital per worker rises, output per worker rises. However, the increase in output per worker from an
addition to capital is smaller, the larger is the existing amount of capital per worker.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Production function
MSC: Analytical
23. An increase in the saving rate does not permanently increase the growth rate of real GDP per person.
ANS: T DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Saving rate
MSC: Definitional
24. Other things the same, another unit of capital will increase output by more in a poor country than in a rich
country.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Diminishing returns MSC: Interpretive
25. The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely ever to
experience the economic growth rates of wealthier countries.
ANS: F DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Catch-up effect
MSC: Interpretive
26. Two countries with the same saving rates must have the same growth rate of real GDP per person.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Saving rate | Catch-up effect
MSC: Definitional
27. When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more than does
production in Russia (that is, Russian GDP).
ANS: F DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Foreign investment
MSC: Applicative
28. If your company opens and operates a branch in a foreign country, you will be engaging in foreign direct
investment.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance TOP: Foreign investment
MSC: Definitional
29. Investment in human capital has opportunity costs, but investment in physical capital does not.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Opportunity costs | Human capital | Physical capital MSC: Interpretive
150 Chapter 25 /Production and Growth
30. Incentives for parents to send their children to school, such as small monthly payments to parents if their
children have regular attendance, appear to increase school attendance.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Definitional
31. A country that made its courts less corrupt and its government more stable would likely see its standard of
living rise.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Property rights
MSC: Definitional
32. If a country made it easier for people to establish and prove the ownership of their property, real GDP per
person would likely rise.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Property rights
MSC: Interpretive
33. Economists generally believe that inward-oriented policies are more likely to foster growth than outward
oriented policies.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Trade policy
MSC: Definitional
34. If a rich country reduced subsidies to domestic producers who produce goods for which poor countries have a
comparative advantage, the standard of living in these poor countries would likely rise.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Trade policy
MSC: Definitional
35. One reason that governments may find it useful to sponsor universities and basic research is that to a large
extent knowledge is generally a private good.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Public goods
MSC: Interpretive
36. The population growth rate tends to be higher in developed countries than in developing countries.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Population growth
MSC: Definitional
37. In countries where women are discriminated against, policies that increase the likelihood of career success
and educational opportunities for women are likely to decrease the birth rate.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Population growth
MSC: Definitional
38. Countries with high population growth rates tend to have lower levels of educational attainment.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Population growth
MSC: Definitional
39. Studies confirm that controlling for other variables such as the percentage of GDP devoted to investment, poor
countries tend to grow at a faster rate than rich countries.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Catch-up effect
MSC: Definitional
Chapter 25 /Production and Growth 151
40. An increase in capital increases productivity only if it is purchased and operated by domestic residents.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Foreign investment
MSC: Definitional
41. Other things the same, an economy’s factors of production are likely to be used more effectively if there is an
economywide respect for property rights.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Property rights
MSC: Definitional
42. Economist Michael Kremer found that world growth rates fell as population increased.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Population growth
MSC: Definitional
SHORT ANSWER
1. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use these numbers
to compute the percentage increase in real GDP per person from 1987 to 2005.
Year Real GDP (2000 prices) Population
1987 $6,435,000 million 243 million
2005 $11,092,000 million 296.6 million
ANS:
Real GDP per person in 1987 was $6,435,000/243= about $26,481. Income per person in 2005 was
$11,092,000/296.6 = about $37,397. Income per person grew by (37,397 - 26,481)/26,481 = about 41.2 percent.
DIF: 1 REF: 25-1 NAT: Analytic
LOC: Productivity and growthTOP: Real GDP | Economic growth
MSC: Applicative
2. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and
standard of living mean. Make a list of things that determine labor productivity.
ANS:
The standard of living is a measure of how well people live. Income per person is an important dimension of the
standard of living and is positively correlated with other things such as nutrition and life expectancy that make
people better off. Productivity measures how much people can produce in an hour. As productivity increases, people
can produce more (and use less to produce the same amount) and so their standard of living increases.
The factors that determine labor productivity include the amounts of physical capital (equipment and structures),
human capital (knowledge and skills), and natural resources available to workers, as well as the state of
technological knowledge in society.
DIF: 2 REF: 25-1 NAT: Analytic
LOC: Productivity and growthTOP: Productivity | Standard of living
MSC: Interpretive
