Economic Growth


Review Questions

1. What explains the long-run growth of aggregate GDP?

 

  

 
2. What is productivity?

 
3. What explains variations in labor productivity?

 
4. What explains variations in total factor productivity?

 

  

 
5. Is it possible for an economy to continue growing forever solely by accumulating more capital?

 
6 How does an increase in the saving rate affect economic growth?

 

 Answers
7. How does an increase in the population growth rate affect economic growth?

 

  

 
8. What explains the long-run growth of per capita GDP?

 
9. Why do countries like the United States, Germany, and Japan all seem to be converging to the same level of per capita GDP?

 
10. Why don’t all countries converge to the same level of per capita GDP as the United States, Germany, and Japan?

 
11. How does an increase in the tax rate on income from capital affect economic growth?


Old Exam Questions

1. During the 1950s and 1960s, Germany and Japan had much faster rates of economic growth than did the United States.  What might account for these differences in growth rates?  Did these differences occur because of a fundamental defect in the U. S. economy?

 
Answer:

One explanation for the higher growth rates of Japan and Germany is that those countries ended World War II with much lower capital stocks per worker than the United States had. If all three countries have the same technology and the same preferences for consumption versus leisure and for current versus future consumption (i.e., the same saving behavior), they should all eventually converge to the same capital-labor ratio. During the years when Japan and Germany were building up their capital stocks, they would grow at a faster rate than the United States. This pattern of growth rates would not imply any fundamental defect in the U.S. economy.

 
2. The 1983 Economic Report of the President stated that "Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards."

 
a. Using the economic statistics published by the government, how would one measure living standards?
b. Does devoting a larger share of output to investment necessarily lead to a higher standard of living? Why or why not? If possible, give some examples to illustrate your arguments.
c. Does devoting a larger share of output to investment necessarily lead to more rapid growth of living standards? Why or why not?

 
Answer:

 
a. Real per capital GDP or real per capita consumption.
b. Countries with higher rates of saving and investment will have higher steady-state capital stocks. A higher steady-state capital stock leads to higher per capita output but may not lead to higher consumption. Depreciation rises with the capital stock. With a higher steady-state capital stock, a country must invest more simply to replace depreciating capital. If an increase in the steady-state capital stock raises depreciation more than output, then the country has less left for consumption. There is no clear case of a country with such a high level of investment, although Singapore is sometimes suggested.
c. If a country starts with a capital stock below the steady-state level, investment allows it to move to the steady-state capital stock. This increase in the capital stock raises output. The more a country invests, the faster its capital stock increases. Once the steady-state capital stock is reached, investment-induced growth ceases. Thus, higher investment does not lead to permanently higher growth.