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Growth and Production
Classify the following as either: (A) A resource that is used to produce income, (B) something that
would cause, aid, or contribute to economic growth, (C) something that would harm or limit economic
growth, (D) none of the above. If a specific place is mentioned, then the question concerns that
economy only.
1. Innovation of new technology: B
2. Technology: A
Important Note: Why is one of the above “A” and the other answer is “B”? Growth is the result of the
increase or expansion of certain resources (namely more technology, more physical capital, more
human capital, or better institutions). Thus “technology” is a resource. By itself, it does not cause
growth. To cause growth, an economy must increase the stock of technology. This difference between
the “thing” and an “increase in the thing” will be used below too.
3. Investment: B (investment is the purchase of, thus increasing, new capital or technology)
4. The economy has a high standard of living with a high income: C. Because of diminishing
returns, an economy that is capital intensive has a harder time growing. More capital doesn’t help
that much. This is why poor countries can grow faster or “catch up” or converge.
5. A company buys a new drill press: B, this is an example of investment
6. Trees: A
7. Labor: A
8. Money: D
9. High or erratic Inflation: C (bad institution)
10. Increases in population: C (strains or stretches resources)
11. Your instructor buys French fries at In-N-Out: D
12. The economy is currently very poor: B. Though being poor doesn’t cause growth, being poor can
“contribute” to growth – this is the idea of “catch up”. See #4 above.
13. Human Capital: A
14. Increases in technological knowledge: B
15. Natural resources are being depleted: C
16. Workers are receiving more training: B
17. Companies spend money on R & D: B
18. Oil: A
19. The US does not re-elect the current president: D. Not reelecting the president is not a sign of
instability since changing the president is part of our stable system.
20. Capital: A
21. Bolivia undergoes revolutions periodically to create land reforms that redistribute wealth from the
rich to the poor.: C. This example has two bad institutions for growth. Periodic revolutions and
redistributions violate private property and stable government institutions.
22. European Nations unite to create free-trade zones where exports and imports are not taxed or
restricted.: B
23. There's an increase in savings in the economy.: B. Savings funds investment which makes an
economy grow.
Decide which of the following statements are true or false:
24. Economic growth is an increase in real income.: False. Economic growth is permanent increase
in real income per person (or a permanent increase in worker productivity).
25. Capital is one important cause of economic growth: False. Increases in capital is an important
cause of economic growth. See #1 and #2 in the previous set of questions above.
26. Countries with stable governments will tend to have higher growth rates: True
27. Countries with institutions like capital and technology grow faster: False. Capital and technology
are not institutions. They are a different resource.
28. The main sources of growth are land, labor, capital, and technology: False (Missing “increases in”
and includes labor and land. See more below, #32 and #35)
29. As the population grows, the economy will experience growth: False, just the opposite. Increases
in population strain resources.
30. Property rights are an example of an institution that encourages growth: True
31. People learning new skills is an important source of economic growth: True (investment in
human capital)
32. The main sources of growth are increases in land, labor, capital and technology: False (Increases
in labor are not a source of growth. Increases in land are greatly limited for most economies and
not a main source of growth. See #35 below)
33. Technology is different than other resources because it can be used by everyone: True
(technology is a public good)
34. Human capital is different than physical capital because human capital requires a human worker
to operate the machine and physical capital does not: False (Human capital is not a machine that
needs a human operator. Human capital is the skills, training, knowledge, and experience of
workers. It’s what’s in workers’ heads).
35. The main sources of growth are increases in capital and technology: True