Economic Growth


Review Questions

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

 

  

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

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

 

  

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

 

 Answers

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

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

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

 
8. 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. Three possible sources of growth in per capita output are:
i.  population growth
ii.  capital accumulation
iii. 
technological progress
a. Which of these factors can account for growth in per capita output during a country's transition to a long-run, steady-state equilibrium? Explain. Give some real-world examples.
b. Which factors can account for continuing growth in per capita output once the long-run steady state has been reached? Explain.

 
Answer:

Both technical progress and capital accumulation can contribute to the growth of per capita output during a country's transition to a long-run, steady-state equilibrium, with capital accumulation being likely to play a particularly important role. (This assumes the country is starting out below the steady-state capital stock.) Numerous examples could be cited, but the rapid growth of Germany and Japan after World War II are particularly striking. Once the steady state has been reached, only technical progress can sustain continued growth of per capita output. Capital accumulation alone will be ineffective because the marginal product of capital declines as more capital is added and eventually falls below the increased depreciation resulting from a higher capital stock. A higher rate of population growth would slow a country's approach to a steady-state equilibrium and would cause the level of per capita output to be lower once the steady state is reached.

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