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Quiz 9 :

Economics Growth and Business Cycles

Quiz 9 :

Economics Growth and Business Cycles

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What are the two major determinants of the overall growth of the economy according to the view of economic growth based on labor data?
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According to the view of economic growth based on labor data labor productivity and number of hours worked are the two major determinants of the overall growth of the economy.
Labor productivity is the ratio of output to number of hours worked. It is also known as productivity per worker. It gives the quantity of output produced in the economy from one hour of labor effort. The formula for calculating labor productivity is
img …… (1)
Increase in labor productivity implies more output is produced per hour. It may happen due to improvement in technology, increase in availability of capital per worker or due to efficient organization and management of work. Labor productivity determines the demand for labor.
The relation among output, labor productivity and hours worked is given by the formula
img …… (2)
Transforming equation (2) in terms of growth rates we get
img …... (3)
Thus, growth in output is caused by a positive change in labor productivity or a change in hours worked or both. However, growth of hours worked almost remains stable over time. Hence, growth of labor productivity is a major factor determining growth in output.

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In the long run, what determines employment growth in the economy?
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Employment growth refers to increase in the proportion of employed workers in total labor force. Employment growth in the economy in the long run is determined by the supply of and demand for labor.
Demand for labor is determined by the productivity of labor and the state of economic activity. If productivity of labor increases demand for labor increases and there will be a high growth of employment. Further, if there is a boom in the economy the economic growth will be high.
Hence, the number of employed workers among total labor force also increases. In times of recession and depression growth rate of firms will be very low or even negative. Then they do not hire more workers which cause a decline in employment.
Supply of labor is determined by the rate of growth of population. Total labor force increases with population growth. It leads to increased supply of labor.
When the supply of labor is very high compared to the demand for labor employment rate will come down. Employment declines if the growth of the labor force is more than the growth of the economy.

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What are the three main postwar periods in which trend output and productivity have varied?
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The trend output and productivity varied in three main postwar periods, which can be distinctly identified as follows:
• The period from October 1949 to November 1970: It is called as economic liftoff. In this period the United States was the strongest economy in the world. This period witnessed rapid growth in productivity of labor and hours worked.
• The period from November 1970 to November 1982: It is called the period of reorganization. Growth in labor productivity declined sharply in this period. Growth in hours worked increased only modestly hence there was a remarkable decline in growth of output. The United States faced many problems like high oil prices and high inflation. It witnessed poor macroeconomic policies. There was also a transition from manufacturing to services.
• The period from November 1982 to December 2010: It is called long boom. In this period both labor productivity and hours worked registered a remarkable increase contributing to high growth in output. The US economy witnessed a steady growth in output and became the powerful economy in the world.

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How much did the labor-force participation rate increase in the United States in the 1990s compared with the previous 15 years?
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What is the unemployment rate? How is it measured?
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Describe the differences between labor productivity and total factor productivity.
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Can changes in trend TFP growth help to explain changes in trend output growth?
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What is a business cycle? What group determines the offi cial starting and ending dates of business cycles in the United States?
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What are the main causes of business cycles? Is there one main cause?
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Why should workers care about increases in labor productivity?
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Suppose that the country of Bigu has a population of 127 million, of which 83 million are in the working-age population. Of those, 25 million are not in the labor force and 52 million are employed. a Calculate the working-age population as a percentage of the population. b Calculate the labor-force participation rate. c Calculate the unemployment rate.
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Suppose that in 2011 a country has capital of 450 units, labor of 5,000 units, and output of 10,000 units. In 2012, the country has capital of 480 units, labor of 5,050 units, and output of 10,300 units. In both years, a = 0.2 in Equation (4). Calculate the level of TFP in both years and the growth rate of TFP from 2011 to 2012.
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In the country of Bigcap, the coeffi cient in Equation (4) is a = 0.3, the capital stock is growing 10 percent per year, employment is growing 1 percent per year, and output is growing 5 percent per year. In the country of Smallcap, the coeffi cient in Equation (4) is a = 0.1, the capital stock is growing 3 percent per year, employment is growing 2 percent per year, and output is growing 4 percent per year. In which country is TFP growing the fastest? Explain your answer and interpret what the result means.
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If you started a job at age 21 earning $30,000 per year and your salary increased 5 percent each year, how much would you be making by the time you retired at age 70? What if your salary increased only 3 percent per year?
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Which economy is better off, country A, in which output is growing 6 percent per year with population growth of 4 percent per year, or country B, in which output is growing 4 percent per year with population growth of 1 percent per year? Explain your answer.
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What happens to each of the following variables in economic expansions? a Output per hour worked b Hours worked per worker c Employment as a fraction of the labor force d Labor force as a fraction of the population In each case, provide an economic rationale for your answer. Given all these results, what happens to output growth in expansions?
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