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CHAPTER 17
1a.
FIGURE 17A-1 Binonia’s Production Possibilities
The decision to produce more shovels and fewer milkshakes is illustrated in
the left-hand graph by a movement from point e to point f on Binomia’s initial
production possibilities curve, PPC0. Because Binomia is devoting a larger
proportion of its economic resources to the production of capital goods, this
enhances the future expansion in its production possibilities, as illustrated
by the shift from PPC0 to PPC1 in the graph.
b. With more economic resources, Binomia's production possibilities expand.
This is illustrated in the left-hand graph by the shift from PPC0 to PPC1.
c. With a technological innovation in the production of shovels, Binomia's
production possibilities expand as illustrated by the shift from PPC3 to PPC4
in the right-hand graph. Unlike the shifts shown in the left-hand graph, this
trend involves only a rightward movement in the curve, rather than an upward
and rightward shift, since only the potential production of shovels is
affected.
2a. 48 (= 72/1.5) years
b. 2.67 (= 72/27) percent
c. Because population doubles every 24 (= 72/3) years, it will double
approximately 4 times in 100 years.
3a. In 2001, Ergonia’s labour productivity is $62 500 (= $500 billion/8
million workers). In 2002, it is $67 500 (= $540 billion/8 million workers).
b. Ergonia’s rate of productivity growth is 8 percent [= (($67 500 - $62
500)/$62 500) x 100].
4. Since 2000, relatively low Canadian interest rates have led to high levels
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of Canadian investment. Combined with rising levels of educational attainment
for Canadian workers, this raised labour productivity. At the same time, the
proportion of Canadians in the labour force is rising due to higher
participation rates, especially for young people.
5. In contrast to authoritarian regimes, stable democratic governments foster
economic development by promoting investment in both capital and human
resources. In a democratic country, it is less likely that property rights
will suddenly disappear. Businesses investing in capital resources can
therefore be reasonably certain that they will receive future profits from
investment projects. In addition, individuals investing in human resources can
be reasonably certain they will receive additional future income in payment
for current education costs. Democratic governments pose possible problems for
economic development as well. For example, popular demands for generous income
maintenance schemes may cause an elected government to engage in high levels
of public spending financed by unsustainable tax rates or budget deficits.
6. Given the vicious circle of poverty, per capita incomes in many countries
are kept low because productivity growth is dampened by labour-intensive
production. This arises from low investment in capital and human resources as
well as from rapid population growth. Government initiatives to overcome this
vicious circle must concentrate on promoting productivity growth, either
through investment strategies or population control programs. Investment in
capital resources can be promoted through measures that promote domestic
saving and investment(for example, government-run pension schemes). Investment
in human resources can be promoted by government initiatives that widen access
to publicly funded education. Government-sponsored population control measures
include laws that enforce a compulsory maximum family size (as in China) or
that provide incentives to parents who choose to limit the size of their
families (for example, through subsidies to those who participate in birth
control programs).
7. It is true that, in the long term, economic development in low-income
countries will be primarily tied to their full participation in the global
economy. Moreover, one of the main factors that will help ensure this
participation is trade liberalization. At the same time, many low-income
countries face social and economic problems whose short-term solution depends
crucially on foreign aid from high-income countries and from multilateral
organizations such as the World Bank.
8a. The factors that have promoted economic growth in recent years will
probably continue to be important over the next decade. Given that much of
Canada’s future economic growth will be in knowledge-based industries,
technological progress and improvements in the quality of labour will be two
crucial factors. Increases in quantities of capital will also be important, as
international trade liberalization and growing global competitive pressures
force Canadian businesses to maintain high levels of investment spending.
b. For example, government subsidies for R&D and job training will speed the
pace of technological progress and improvements in labour quality.
Macroeconomic management that helps keep Canada’s real interest rates at low
levels will promote business investment.
9a. For example, Canadian governments could provide incentives through tax
write-offs for investing companies. They could also help encourage links
between businesses and researchers in Canadian universities and colleges.
b. Tax write-offs for investing companies will raise Canadian business
investment, gradually raising Canada's capital stock and increasing the growth
rate of labour productivity. The encouragement of links between business and
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Chapter 17
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the post-secondary sector will increase the diffusion of new technologies and
products, again stimulating productivity growth.
Internet Application Question
1. The answer is found in the links to 'What We Do'. The Bank funds its loans
by borrowing in international financial markets as well as by using funds
provided by member countries.
2. The answers are found in the links to 'What We Do'. A new interest rate on
the Bank's loans is set every six months. The average maturity on loans is 1
to 9 years (with a grace period of 5 years).
3. A country's eligibility for loans from the World Bank and the Bank's
affiliates depends on the country's per capita income valued in US dollars.
Only countries with per capita incomes under about $1885 are eligible for
interest-free credits from the Bank's affiliate, the International Development
Association (IDA). Countries with per capita incomes between $885 and $1445
can receive a blend of World Bank loans and IDA credits. Countries with
incomes between $1445 and $5225 are eligible only for World Bank loans. Once a
country reaches the $5225 income threshold, the country 'graduates', and its
borrowing privileges from the World Bank are phased out.
ANSWERS TO QUESTIONS AT THE END OF 'SHIFTING GEARS'
1. The three eras of economic development distinguished by Beck are the
commodity-processing era, the manufacturing era, and the technology era.
a) Examples of engines are the steel industry in the commodity-processing era,
the machine-tool industry in the manufacturing era and the computer industry
in the technology era.
b) Examples of virtuosos are William Kelly and Henry Bessemer (developers of
an inexpensive and efficient method of making steel) in the commodityprocessing era, Henry Ford (the developer of the first mass-produced car) in
the manufacturing era, and Jack Kilby (the inventor of the computer microchip)
in the technology era.
c) Examples of characteristic technologies are fabricating primary resources
in the commodity-processing era, assembly-line production in the manufacturing
era, and robotics in the technology era.
d) Examples of fast-track jobs are primary-industry jobs in the commodityprocessing era, blue-collar work in the manufacturing era, and science-related
employment in the technology era.
e) Examples of losers are merchants in the commodity-processing era, railways
in the manufacturing era, and paper producers in the technology era.
f) Examples of emerging industries are the auto industry in the commodityprocessing era, the semiconductor industry in the manufacturing era and
genetic engineering in the technology era.
g) Examples of roadblocks are lack of standards in the commodity-processing
era, the lack of integrated circuits in the manufacturing era and the lack of
international protection for intellectual property in the technology era.
2. Not only does Canada possess plentiful supplies of some of the most
important minerals used in the technology era, it is highly competitive in
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
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such crucial industries as telecommunications, and has a well-educated and
adaptable workforce, 70 percent of which is already employed in the new
economy.
ANSWERS TO QUESTIONS AT THE END OF 'FINDING THE KEY' (article at
Online Learning Centre)
1. If Jones’ conclusions are correct, then a sustained increase in growth in
per capita incomes can be achieved by raising the proportion of Canadian
output that goes to compensating inventors. This requires higher expenditures
on R&D (through tax incentives), encouraging changes in institutions that help
quicken the diffusion of new ideas (for example, by creating incentives for
cooperation between business and the educational sector), and by decreasing
marginal tax rates on corporate profits and personal income (especially for
those in high income brackets).
2a. Using the rule of 72, it would take 720 years (= 72/.1) for the world's
per capita output to double.
b. Using the rule of 72, it now takes 60 years (= 72/1.2) for the world's per
capita output to double.
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