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CHAPTER 21
ECONOMIC GROWTH AND RISING LIVING STANDARDS
EVEN NUMBER ANSWERS, SOLUTIONS, AND EXERCISES
ANSWERS TO 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 population-growth 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).
PROBLEM SET
2.
a.
France
Japan
1950
54.5%
19.6%
1990
83.3%
90.1%
Kenya
India
6.4%
6.2%
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 (solid
line) to PF2 (dotted line). 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 may cause an
additional movement to the right along the existing production function. But real
GDP cannot continually increase after that.
c. False. If growth is coming from investment in capital alone, then real GDP per capita
would eventually have to grow at a decreasing rate, because of diminishing marginal
returns. That is, real GDP per capita might grow for a number of years, but it cannot
continue to grow at the same rate forever.
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
$22,080,000,00
0
Use the equation %  output per capita = %  productivity + %  average hours + % 
EPR to find:
The growth rate from year 1 to year 2 = 0.05 - 0.11 - 0.07 = -0.12, or -12%
The growth rate from year 2 to year 3 = 0.10 + 0.05 + 0.17 = 0.32, or 32%
The growth rate from year 3 to year 4 = 0.03 + 0.17 + 0.00 = 0.20, or 20%
10.
For this Problem, we can use the rule that % Real GDP per capita = % Productivity +
% Average hours + % EPR.
a. % Real GDP per capita = 0.02 + 0.00 + 0.02 = 0.04, or 4%.
b. % Real GDP per capita = 0.02 + 0.00 + 0.00 = 2%.
c. % Real GDP per capita = 0.02 + 0.02 + 0.00 = 4%.
d. % Real GDP per capita = 0.02 – 0.02 – 0.02 = -2%.
MORE CHALLENGING
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.