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CHAPTER 21
ECONOMIC GROWTH AND RISING LIVING STANDARDS
ANSWERS TO EVEN-NUMBERED ONLINE REVIEW QUESTIONS
2. The three ways a country can increase its equilibrium level of output are (1)
increases in employment; (2) increases in the capital stock (of both physical and
human capital); and (3) technological change.
4. A tax cut would require either (a) a rise in the budget deficit; or (b) a cut in
government spending. In case (a), the interest rate will rise and crowd out private
investment spending, which could slow down the rate of capital formation and the
rate of economic growth.
In case (b), the government might cut public investment expenditures (e.g., on
roads and bridges) that would decrease public capital formation, and slow down
the rate of economic growth.
6. Technological change and growth in the capital stock have enabled output in
general, and food production in particular, to more than keep pace with population
growth. (Answers about the future accuracy of Malthus’s prediction can vary. But
if technological progress and capital growth continue to outpace population
growth, Malthus’s dire prediction will continue to be unrealized.)
8. A poor country must use virtually all of its resources to produce consumption
goods and services, leaving few resources to produce capital equipment that
would spur economic growth. Also, poor countries tend to have high populationgrowth rates (see the answer to the previous problem), putting further pressure on
living standards.
10. LDCs might attempt to improve their growth performance in four ways: (1)
moving along the PPF by producing fewer consumer goods and more capital
goods; (2) reducing the consumption of the rich in order to free up resources for
capital formation; (3) foreign assistance; and (4) limits on population growth. The
opportunity cost of (1) is borne by the citizens in the form of consumption of
fewer consumer goods (this may mean starvation for poorer citizens). The
opportunity cost of (2) is borne by rich citizens in the form of consumption of
fewer consumer goods. The opportunity cost of (3) is borne by citizens of the
countries providing assistance in the form of consumption of fewer consumer
and/or capital goods. The opportunity cost of (4) is borne by the people who want
children but who are not allowed to have them (heartache), or by the children who
are killed (usually female infants) to achieve the population growth limits (they
pay with their lives).
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Even-Numbered Answers for Economics: Principles and Applications, 4e
EVEN-NUMBERED PROBLEM SET
2.
a.
France
Japan
Kenya
India
1950
54.5%
19.6%
6.4%
6.2%
1990
83.3%
90.1%
4.9%
6.2%
France and Japan appear to be catching up to the United States; Kenya and
India are falling behind.
b. At the current growth rates, France would catch up to the United States about
19 years after 1990, or in the year 2009. In that year, U.S. GDP per capita
would be (1.02)19  $21,558 = 31,406, while France’s GDP per capita would
be (1.03)19  $17,959 = $31,491—almost the same. At current growth rates,
neither Indian nor Kenyan GDP would ever catch up to U.S. GDP.
4.
An increase in the capital stock will shift the production function upward, from
PF1 to PF2. For a given number of workers, real GDP will increase from GDPA to
GDPB. However, the increase in the capital stock makes workers more productive,
and as the labor demand curve shifts rightward, more workers will become
employed. This is shown as the movement from L1 to L2, which causes real GDP
to increase from GDPB to GDPC. The overall effect of the increase in the capital
stock is to increase real GDP from GDPA to GDPC.
6.
a. True. The increase in employment leads to a movement rightward along the
existing production function.
b. True. The increase in the capital stock will shift the production function
upward, increasing real GDP, and then the increased productivity of labor
Chapter 21
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may cause an additional movement to the right along the existing production
function. But real GDP cannot continually increase after that.
c. True, because the capital stock will be growing.
d. True. If planned investment increases, then the capital stock will increase,
leading to faster real GDP growth.
8.
Total hours
worked
Labor force
Population
Productivity
Average hours
per worker
EPR
Total Output
Year 1
192 million
Year 2
200 million
Year 3
285 million
Year 4
368 million
1,200,000
2,000,000
$50 per hour
160
1,400,000
2,500,000
$52.50 per hour
142.86
1,900,000
2,900,000
$58 per hour
150
2,100,000
3,200,000
$60 per hour
175.24
0.60
$9,600,000,000
0.56
$10,500,000,000
0.655
$16,530,000,000
0.656
$22,080,000,000
Use the equation %  output = %  productivity + %  average hours + % 
LFPR + %  population to find:
The growth rate from year 1 to year 2 = 0.05 -0.11 -0.07 + 0.25 = 0.12, or 12%
The growth rate from year 2 to year 3 = 0.10 + 0.05 + 0.17 + 0.16 = 0.48, or 48%
The growth rate from year 3 to year 4 = 0.03 + 0.17 + 0.00 + 0.10 = 0.30, or 30%
10. For this Problem, we can used the rule that % Real GDP = % Productivity + %
Average hours + % EPR + % Population. Also % Real GDP per capita = %
Total output - % Population = % Productivity + % Average hours + % EPR
a. % Real GDP = 0.02 + 0.00 + 0.02 + 0.02 = 0.06, or 6%.
0.02 + 0.00 + 0.02 = 0.04, or 4%.
% Real GDP per capita =
b. % Real GDP = 0.02 + 0.00 + 0.00 + 0.02 = 4%.
0.00 + 0.00 = 2%.
% Real GDP per capita = 0.02 +
c. % Real GDP = 0.02 + 0.02 + 0.00 + 0.02 = 6%.
0.02 + 0.00 = 4%.
% Real GDP per capita = 0.02 +
d. % Real GDP = 0.02 - 0.02 - 0.02 + 0.02 = 0%, no change.
capita = 0.02 – 0.02 – 0.02 = -2%.
% Real GDP per
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Even-Numbered Answers for Economics: Principles and Applications, 4e
MORE CHALLENGING QUESTIONS
12. a. The first step in answering this question is to compute the net growth rate of the
capital stock as the difference between the investment rate and the depreciation rate.
Here, that is 4% - 2% = 2%, so the capital stock is growing. Therefore, the PPF is
shifting outward over time. What about capital per worker? With a constant EPR, a
2% annual growth rate of population translates to a 2% annual growth rate of labor
input. Because capital per worker is increasing at the same rate as the labor force,
there is no change over time in capital per worker. Therefore, the average living
standard will remain constant.
b. In this case, the capital stock grows by 4% - 2% = 2% per year. As a result, the
PPF will continue to shift outward. The population (and therefore the labor force)
is only growing half as fast as capital. Therefore, capital per worker is increasing
(at 2% - 1% = 1% per year), and so is the average living standard.
c. In this scenario, the capital stock is shrinking because the depreciation rate (2%)
exceeds the rate of investment (1%). The PPF will shift inward over time. And
even with a constant population, capital per worker will fall, and so will the average
living standard.