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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 Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Chapter 17 107 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 Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Chapter 17 108 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. Chapter 17 109 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. Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Chapter 17 110