Macroeconomics Study Set 62

Business

Quiz 7 :

Economic Growth: Theory and Policy

Quiz 7 :

Economic Growth: Theory and Policy

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The following table shows real GDP per hour of work in four imaginary countries in the years 2004 and 2014. By what percentage did labor productivity grow in each country Is it true that productivity growth was highest where the initial level of productivity was the lowest For which countries img
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Following table shows the labor output per hour for various countries:
img The labor productivity growth rate is computed by using the following formula:
img ……(1)
Where,
img = Current period output
img = Previous period output
Labor productivity growth rate: Country A
Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country A.
img Hence, the growth rate of Country A is
img Labor productivity growth rate: Country B
Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country B.
img Hence, the growth rate of Country B is
img Labor productivity growth rate: Country C
Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country C.
img Hence, the growth rate of Country C is
img Labor productivity growth rate: Country D
Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country D.
img Hence, the growth rate of Country D is
img Yes, in case of Country C, the initial productivity was lower, but it achieved higher productivity growth rate. Country C's initial productivity per hour was $2, but it registered a 50 percent growth rate, which is highest among all the four countries.

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Which of the following prices would you expect to rise rapidly Why a. Cable television rates b. Football tickets c. Internet access d. Household cleaning services e. Driving lessons
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Prices expected to increase
• Football tickets
• Household services
• Driving lessons
Price increases rapidly
The price of household cleaning services, football tickets, and the driving lessons are expected to increase rapidly because of the following reasons:
• These services are less demand elastic.
• Less competition in the market.
Hence, by rising the price, the seller will not lose the consumer.
On the other hand, the prices of cable television rates and internet access may not increase rapidly.
• Demand of these services is highly elastic.
• These markets are highly competitive.
Since competition is the price killer, the producer cannot increase the prices of cable television and internet access.

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Explain why the best educational policies to promote faster growth might be different in the following countries. a. Mozambique b. Brazil c. France
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Impact of education on economic growth
The level of education has greater impact on the productivity of the labor. The labor who has the higher educational qualification, has higher productivity and vice versa. The productivity is directly positively related to the economic growth of the country; that is, if the productivity of the labor is high, then the country has higher economic growth rate and vice versa.
The average level of education in the less developed countries is very low; medium in the developing countries; and higher in the developed countries.
a. Impact of education on economic growth of Mozambique
Since the level of average education in the less developed country is very low, the labor in the less developed country has low productivity. Therefore, the growth rate of the country is very low.
The best educational policy would promote higher amount of increase in the average education, which in turn increases the large amount of productivity which results in faster economic growth.
Since Mozambique is an under-developed country, the best educational policy has increased the average level of education by a greater amount which causes higher growth rate of the country.
b. Impact of education on economic growth of Brazil
Since the level of average education in the developed country is moderate, then the labor in the developed country has moderate productivity. Therefore, the growth rate of the country is moderate.
The best educational policy would promote medium amount of increase in the average education, which in turn increases the medium amount of productivity which then results in medium amount of increase in the level of growth.
Since Brazil is a developing country, the best educational policy has increased the average level of education by a medium amount, which causes medium growth rate of the country.
c. Impact of education on economic growth of France
Since the level of average education in the developed country is very high, then the labor in the developed country has higher productivity. Therefore, the growth rate of the country is very high.
The best educational policy would promote smaller amount of increase in the average education. This, in turn, increases the small amount of productivity which results in small amount of increase in the level of growth.
Since France is a developed country, the best educational policy has increased the average level of education by a small amount, which then results in low growth rate of the country.

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Imagine that new inventions in the computer industry affect the growth rate of productivity as follows: img Would such a pattern help explain U.S. productivity performance since the mid-1970s Why
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Discuss some of the pros and cons of increasing development assistance, both from the point of view of the donor country and the point of view of the recipient country.
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Explain why economic growth might be higher in a country with well-established property rights and a stable political system compared with a country where property rights are uncertain and the government is unstable.
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The previous chapter pointed out that, because faster capital formation comes at a cost (reduced current consumption), it is possible for a country to invest too much. Suppose the government of some country decides that its businesses are investing too much. What steps might it take to slow the pace of capital formation
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Show on a graph how capital formation shifts the production function. Use this graph to show that capital formation increases labor productivity. Explain in words why labor is more productive when the capital stock is larger.
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Comment on the following: "Sharp changes in the volume of investment in the United States help explain both the productivity slowdown in 1973 and the productivity speed-up in 1995."
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Explain the different objectives of (long-run) growth policy versus (short-run) stabilization policy.
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Two countries have the production possibilities frontier (PPF) shown in Figure 3. Consumia chooses point C, whereas Investia chooses point I. Which country will have the higher PPF the following year Why img
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