1. Economic growth is best measured either by an increase in (nominal, real) ______________ GDP over a
time period or by an increase in ______________ GDP per capita over a time period. A rise in real GDP
per capita (increases, decreases) ______________ the standard of living and ______________ the
burden of scarcity in the economy.
2. Assume an economy has a real GDP of $3600 billion. If the growth rate is 5 percent, real GDP will
increase by ($360, $180) ______________ billion next year; but if the rate of growth is only 3 percent,
the annual increase in real GDP will be ($54, $108) ______________ billion. A two percentage point
difference in the growth rate results in a ($72, $254) ______________ billion difference in the annual
increase in real GDP.
3. Since 1950, real GDP in the United States increased at an annual rate of about (2.0, 3.2)
______________ percent and real GDP per capita increased at an annual rate of about
______________ percent.
4. Modern economic growth is uneven across countries because leader countries have experienced such
growth for a (shorter, longer) ______________ time period and follower countries have experienced
such growth for a ______________ time period. It is possible for a follower country to catch up with
the standard of living of a leader country if the economic growth rate for the follower country is
significantly (smaller, larger) ______________ than
the growth rate for the leader country, and the difference is sustained over time.
5. Among the institutional structures that contribute to modern economic growth in leader countries are
established property (lines, rights) ______________, protection for copyrights and (movies, patents)
______________, the
efficient channeling of savings and investment, (financial, government) ______________ institutions,
widespread
programs for (immigration, education) ______________, specialization in production by nations that
comes from
(free, restricted) ______________ trade, and the use of the competitive market system.
6. The four supply factors in economic growth are
a. ___________________________________________
b. ___________________________________________
c. ___________________________________________
d. ___________________________________________
7. To realize its growing production potential, a nation must fully employ its expanding supplies of
resources, which is the (efficiency, demand) ______________ factor in economic growth, and it must
also achieve productive and allocative ______________, the other factor contributing to economic
growth.
8. In the production possibilities model, economic growth increases primarily because of (demand,
supply) ____________ factors that shift the production possibilities curve to the (left, right)
______________; but if there is less than full employment and production, the economy (may, may
not) ______________ realize its potential.
9. Real GDP of any economy in any year is equal to the quantity of labor employed (divided, multiplied)
______________ by the productivity of labor. The quantity of labor is measured by the number of
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
(businesses, hours of labor) ______________. Productivity is equal to real GDP per (capita, workerhour) ______________.
The quantity of labor employed in the economy in any year depends on the size of the (unemployed,
employed)
______________ labor force and the length of the average workweek. The size element depends on
the size of the working-age population and the labor-force (unemployment, participation)
______________ rate.
The recent record of economic growth in the United States shows that the increase in the quantity of
labor is (more, less) ______________ important than increases in labor productivity in accounting for
economic growth.
Factors contributing to labor productivity include
a. technological ______________
b. increases in the quantity of ______________ and in the quantity available per ______________
c. the improved _____________ and _____________ of workers
d. economies of ______________
e. the improved ______________ of resources.
An increase in the quantity of the capital stock of a nation is the result of saving and (consumption,
investment) ______________. A key determinant of labor productivity is the amount of capital goods
available per (consumer, worker) ______________.
Infrastructure, such as highways and bridges, is a form of (private, public) ______________ investment
that complements ______________ capital goods.
The knowledge and skills that make a productive worker are a form of (physical, human)
______________capital. This type of capital is often obtained through (consumption, education)
______________.
Reductions in per-unit costs that result from the increase in the size of markets and firms are called
(improved resource allocation, economies of scale) ______________, but the movement of a worker
from a job with lower productivity to one with higher productivity would be an example of
______________.
A sustained increase in labor productivity over time will (increase, decrease) ______________ real
output,
_____________ real income, and _____________ real wages.
The characteristics of the recent rise in the aver-age rate of productivity growth are (advances,
declines)
______________ in information technology, business firms that experience returns to scale that are
(decreasing,
increasing) ______________, and global competition that is ______________.
Skeptics contend that the increase in the rate of productivity growth may be a (short-run, long-run)
______________
trend that is not sustainable over a ______________ period.
Critics of economic growth contend that it (cleans up, pollutes) ______________ the environment, it
(does, does
not) ______________ solve problems such as poverty and homelessness, and (is, is not)
______________ sustainable. Defenders of economic growth say that
it creates (less, greater) ______________ material abundance, results in a (higher, lower)
______________
standard of living, and an efficient and sustainable allocation of resources based on price (discounts,
incentives)
______________.
TRUE–FALSE QUESTIONS
1. Economic growth is measured as either an increase in real GDP or an increase in real GDP per capita. T
F
2. Real GDP is the best measure of economic growth for comparing standards of living among nations. T
F
3. Suppose two economies both have GDPs of $500 billion. If the GDPs grow at annual rates of 3 percent
in the first economy and 5 percent in the second economy, the difference in their amounts of growth in
one year is $10 billion. T F
4. Since 1950, the U.S. data show that the average annual rate of growth was greater for real GDP per
capita than for real GDP. T F
5. Growth rate estimates generally attempt to take into account changes in the quality of goods produced
and changes in the amount of leisure members of the economy enjoy. T F
6. Before the advent of modern economic growth starting in England in the later 1700s, living standards
showed no sustained increases over time. T F
7. Poorer follower countries can never catch up with and or surpass the living standards of rich leader
countries. T F
8. An institutional structure that promotes economic growth is a competitive market system. T F
9. Changes in the physical and technical agents of production are supply factors for economic growth that
enable an economy to expand its potential GDP. T F
10. The demand factor in economic growth refers to the ability of the economy to expand its production as
the demand for products grows. T F
11. An increase in the quantity and quality of natural re-sources is an efficiency factor for economic
growth. T F
12. A shift outward in the production possibilities curve is the direct result of improvements in supply
factors for economic growth. T F
13. The real GDP of an economy in any year is equal to its input of labor divided by the productivity of
labor. T F
14. The hours of labor input depend on the size of the employed labor force and the length of the average
workweek. T F
15. Increased labor productivity has been more important than increased labor inputs in the growth of the
U.S. economy since 1995. T F
16. The largest factor increasing labor productivity in the U.S. economy has been technological advance. T
F
17. One determinant of labor productivity is the quantity of capital goods available to workers. T F
18. Public investment in the form of new infrastructure often complements private capital investment. T F
19. Education and training contribute to a worker’s stock of human capital. T F
20. Economies of scale are reductions in per-unit cost that result in a decrease in the size of markets and
firms. T F
21. Moving workers from sectors of the economy with lower productivity to sectors of the economy with
higher productivity improves the allocation of resources in the economy. T F
22. Productivity growth is the basic source of improvements in real wage rates and the standard of living. T
F
23. More specialized inputs and network effects are two sources of increasing returns and economies of
scale in the recent rise in the average rate of productivity growth. T F
24. Critics of economic growth say that it adds to environmental problems, increases human stress, and
exhausts natural resources. T F
25. Defenders of economic growth say it is sustainable in the short run, but not in the long run. T F
PROBLEMS
1. Given the hypothetical data in the table below, calculate the annual rates of growth in real GDP and
real per capita GDP over the period given. The numbers for real GDP are in billions.
2. Suppose the real GDP and the population of an economy in seven different years were those shown in
the following table.
a. How large would the real per capita GDP of the economy be in each of the other six years? Put your
figures in the table.
b. What would have been the size of the optimum population of this economy? ________
c. What was the amount of growth in real GDP between year 1 and year 2? $ ________
d. What was the rate of growth in real GDP between year 3 and year 4? ________%
3. The table below shows the quantity of labor (measured in hours) and the productivity of labor
(measured in real GDP per hour) in a hypothetical economy in three different years.
a. Compute the economy’s real GDP in each of the three years and enter them in the table.
b. Between years 1 and 2, the quantity of labor remained constant, but
1. the productivity of labor increased by ________%, and
2. as a consequence, real GDP increased by ________%.
c. Between years 2 and 3, the productivity of labor remained constant, but
1. the quantity of labor increased by ________%, and
2. as a consequence, real GDP increased by ________%.
d. Between years 1 and 3
1. real GDP increased by ________%, and
2. this rate of increase is approximately equal to the sum of the rates of increase in the (quantity,
productivity) ________ and the ________ of labor.
3. Use the rule of 70 to calculate how many years it will take to double the standard of living in an
economy given different average annual rates of growth in labor productivity and enter the answers in
the table.
What can you conclude about the effect of small changes in the average annual rate of productivity
growth on the standard of living? _________________________
SHORT ANSWER AND ESSAY QUESTIONS
1. What two ways are used to measure economic growth? Why does the size of the population matter
when considering growth rates?
2. Why is economic growth a widely held and desired economic goal? Explain the reasons.
3. Describe the growth rate for the United States since 1950. What three qualifications should be made
about the rate?
4. Explain how modern economic growth occurred and how it has affected nations and societies.
5. Why is there an uneven distribution of economic growth?
6. Explain how it is possible for the standards of living in poorer nations to catch up with the standards of
living in richer nations. What role does technology play in the catch-up process?
7. Why is the GDP per capita in the United States so much higher than that of other rich leader nations?
8. Describe six institutional structures that promote economic growth in a nation. What other factors also
influence a nation’s capacity for economic growth?
9. What are the six basic determinants of economic growth? What are the essential differences between
the supply, demand, and efficiency factors?
10. How does economic growth affect production possibilities? What demand and efficiency assumptions
are necessary to achieve maximum productive potential?
11. What is the relationship between the real GDP produced in any year and the quantity of labor
employed and labor productivity? What factor appears to be more important for growth?
12. What is technological advance, and why are technological advance and capital formation closely
related processes?
13. What is the relationship between investment and the stock of capital? What is the connection between
increases in the capital stock and the rate of economic growth?
14. What increases the “quality” or human capital of labor? How is this quality usually measured? What are
some of the problems with this path to improving the quality of the labor force?
15. Explain how economies of scale and resource allocation contribute to labor productivity.
16. Explain the relationship between the average rate of productivity growth and real output, real income,
and real wages.
17. Discuss how the microchip and information technology contributed to the recent rise in the average
rate of productivity growth.
18. Describe five sources of increasing returns and economies of scale within the recent rise in the average
rate of productivity growth.
19. Identify and explain implications from the recent rise in the average rate of productivity growth for
long-term economic growth. Is the recent rise in the average rate of productivity growth a long-lasting
trend?
20. What arguments are made for and against economic growth in the United States?