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Chapter 231. J p n s r a G P w s5 1 t i l o y n i 2 0 a d5 9 t i l o aa el D a 6 rlin e n 07 n 6 rlin y ni 2 0 .J p n sp p l t o w s1 7 7m l i ni 2 0 a d e n 08 aa ouain a 2. ilo n 07 n 127.8 million in 2008. Calculate a. The economic growth rate.The economic growth rate is the growth rate of real GDP. Between 2007 and 2008 this growth rate equals [(569 trillion yen 561 trillion yen)/561 trillion yen] 100, which is 1.4 percent.

b. The growth rate of real GDP per person.J p n sp p l t o g e a [ 1 7 8m l i n127.7 million)/127.7 aa ouain rw t (2. ilo million] 100 w i hi 0 1p r e t J p n se o o i g o t r t , hc s . ecn. aa cnmc rwh ae is 1.4 percent, so the growth rate of real GDP per person is 1.4 percent 0.1 percent, or 1.3 percent.

c. The approximate number of years it takes for real GDP per person in Japan to double if the 2008 economic growth rate and population growth rate are maintained.J p n s r a G P p rp r o i g o i g a 1 3p r e t a y a . T e aa el D e esn s rwn t . ecn er h r l o 7 t l su t a J p n sr a G Pp rp r o w l d u l ue f 0 el s ht aa el D e esn il obe in 70/1.3 = 54 years.

2.

For three years, there was no technological change in Longland but capital per hour of labor increased from $10 to $20 to $30 and real GDP per hour of labor increased from $3.80 to $5.70 to $7.13. Then, in the fourth year, capital per hour of labor remained constant but real GDP per hour of labor increased to $10. a. Does Longland experience diminishing returns? Explain why or why not.Longland experiences diminishing returns. Diminishing returns are present if the marginal product of capital diminishes as capital increases, holding technology constant. When capital per hour of labor increases by $10 from $10 to $20, real GDP per hour of labor increases by $1.90 (from $3.80 to $5.70). But when capital per hour increases by another $10 from $20 to $30, real GDP per hour of labor increases by only $1.43 (from $5.70 to $7.13).

b. Does Longland conform to the one third rule? If so, explain why. If not, explain why not and explain what rule, if any, it does conform to.The economy doe not conform to the one third rule; instead it conforms to a one half rule. In this economy, an x percent increase in capital per hour of labor leads to a 0.25x percent increase in real GDP per hour of labor. To determine the rule in Longland, calculate the percentage change in capital per hour labor and real GDP per hour of labor at each of the levels provided in the question, and then divide the percentage change in real GDP per hour of labor by the percentage change in capital per hour of labor. For example, when capital per hour of labor increases by 100 percent from $10 to $20, real GDP per hour of labor increases by 50 percent from $3.80 to $5.70. Or when capital per hour of labor increases 50 percent from $20 to $30, real GDP per hour of labor increases by 25 percent from $5.70 to $7.13.

c. Explain how you would do the growth accounting for Longland and calculate the effect of technological change on growth in the fourth year described above.Growth accounting would be done in qualitatively the same way as in the U.S. economy with the difference that any percentage change in the capital per hour of labor increases real GDP per hour of labor by 50 percent rather than 33 percent. In the fourth year, because capital per hour of labor remained constant, all the increase in real GDP per hour of labor is the result of technological growth. So the 40 percent increase in real GDP per hour of labor is the result of technological change.

3.

If the United States cracks down on illegal immigrants and returns millions of workers to their home countries, explain what happens to a. U.S. potential GDP.U.S. potential GDP decreases. The U.S. production function is unchanged, but equilibrium employment decreases in the United States so that U.S. potential GDP decreases.

b. U.S. employment.The supply of labor in the United States decreases, which decreases equilibrium U.S. employment.

c. The U.S. real wage rate.The supply of labor in the United States decreases, which raises the equilibrium U.S. real wage rate.

In the countries to which the immigrants return, explain what happens to d. Potential GDP.Potential GDP increases. The production function is unaffected, but equilibrium employment increases in those countries so that potential GDP increases.

e. Employment.Employment increases. The supply of labor increases, which increases equilibrium employment.

f. The real wage rate.The wage rate falls. The supply of labor increases, which lowers the equilibrium real wage rate.

4.

In the economy of Cape Despair, the subsistence real wage rate is $15 an hour. Whenever real GDP per hour rises above $15, the population grows, and whenever real GDP per hour of labor falls below this level, the population falls. The tabl s o s C p D s a r s e hw ae epi production function. Initially, the population of Cape Despair is constant and real GDP per hour of labor is at the subsistence level of $15. Then a technological advance shifts the production function upward by 50

Labor (billions of hours per year) 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Real GDP (billions of 2000 dollars) 8 15 21 26 30 33 35

percent at each level of labor. a. What are the initial levels of real GDP and labor productivity?Before the technological advance, labor productivity, which is defined as real GDP divided by employment, was $15.00 an hour. Real GDP was $15 billion and 1.0 billion hours of labor were employed.

b. What happens to labor productivity immediately following the technological advance?Immediately following the technological advance, real GDP rises to $22.5 billion and employment remains at 1.0 billion hours. Labor productivity increases to $22.50 an hour.

c. What happens to the population growth rate following the technological advance?Real GDP per hour exceeds the subsistence level of $15.00, so population growth increases.

d. What are the eventual levels of real GDP and real GDP per hour of labor?Eventually population growth will increase labor supply so that productivity will return to its subsistence level of $15.00 an hour. Real GDP will increase to $52.5 billion. Labor employment will equal 3.5 billion hours so that labor productivity equals $15.00.

5.

Explain the processes that will bring the growth of real GDP per person to a stop according to a. Classical growth theoryAccording to the classical theory, population growth continues at a rapid pace as long as real GDP per person exceeds the subsistence level. With population growth, the supply of labor increases and diminishing returns lowers real GDP per person. Eventually real GDP per person equals the subsistence amount, at which time economic growth ends.

b. Neoclassical growth theoryIn the neoclassical model, technological growth leads to increased saving so that capital accumulates and real GDP per person grows. When technological growth stops, capital continues to accumulate but diminishing returns drives the return on capital lower and so decreases investment and saving. Eventually the capital stock stops growing and economic growth stops.

c. New growth theoryAccording to the new growth theory, economic growth will not stop.

6.

US WresWrdsMs Poutv .. okr ol ot rdcie American workers stay longer in the office, at the factory, or on the farm than their counterparts in Europe and most other r c n t o s a dt e p o u em r p rp r o o e t ey a . ih ain, n hy rdc oe e esn vr h er Poutvt ..i fudb dvdn tecutysgos rdciiy . s on y iiig h onr rs domestic p o u tb t en m e o p o l e p o e .O l p r rdc y h ubr f epe mlyd ny at of the U.S. productivity growth, ... can be explained by the l n e h u sA e i a sa ep t i gi .[ h U S ]a s b a s ogr or mrcn r utn n Te .. lo et all 27 nations in the European Union, Japan, and Switzerland in the amount of w a t c e t d p r h u o w r . T e U S elh rae e or f ok h .. e p o e p ti a a e a e1 8 4h u so w r i 2 0 c m a e mlye u n n vrg ,0 or f ok n 06 oprd

with 1,407.1 hours for the Norwegian worker and 1,564.4 for the French. It pales, however, in comparison with the annual hours worked per person in Asia, where seven economies South Korea, Bangladesh, Sri Lanka, Hong Kong, China, Malaysia and Thailand surpassed 2,200 average hours per worker. But those countries had lower productivity rates. ... CBS News, September 3, 2007 a. What is the difference between productivity in this article and per capita real GDP?Productivity equals GDP divided by the number of people employed; real GDP per person equals real GDP divided by the population. The article probably means to use real GDP rather than nominal GDP when calculating productivity. The major difference is the difference in the denominator: Productivity divides by the number of workers and real GDP per person divides by the population.

b. Identify and correct a confusion between levels and growth rates of productivity in the news article.If the aggregate production function in the United States and the European Union is the same, then the increased hours at work in the United States means that the level of U.S. real GDP per worker exceeds that in the European Union. But it does not mean that the growth rate of U.S. productivity will exceed that in the European Union.

c. If workers in developing Asian economies work more hours than Aeias wyaete nttewrdsms poutv? mrcn, h r hy o h ol ot rdcieIt is likely the case that the aggregate production functions in the Asian economies lie below the U.S. aggregate production function so that for any level of employment U.S. real GDP exceeds t eA i ne o o i s r a G P .I t i c s ,e e t o g A i n h sa cnme el Ds n hs ae vn huh sa workers put in more hours on the job than American workers, U.S. real GDP exceeds Asian real GDP so that U.S. real GDP per worker exceeds Asian real GDP per worker.

7.

You Have Seven Years to Learn Mandarin A recent study by the economist Angus Maddison projects that Chin w l b c m t e w r d s d m n n e o o i s p r o e a il eoe h ol oiat cnmc uepwr in 2015. ... If that happens, America will close out a 125-year r na t eN .1e o o y W a s m dt et t ei 1 9 .C i a u s h o cnm. e sue h il n 80 hn was the largest economy for centuries because everyone had the same type of economy subsistenceand so the country with the most people would be economically biggest. Then the Industrial Revolution sent the West on a more prosperous path. Now the world is returning to a common economy, this time technology-and information based, so once again population triumphs. Fortune, May 12, 2008 a. W y w s C i a t e w r d s l r e t e o o y u t l 1 9 ? h a hn h ol ags cnm ni 80GDP equals GDP per person multiplied by the number of people. Until 1890 most people in the world had approximately the same subsistencel v lo i c m s t a e e yn t o G P p rp r o ee f noe o ht vr ains Ds e esn was about the same. Because China had, by far, t ew r d sl r e t h ol ags pplto,Ciaas hdtewrdslretGP ouain hn lo a h ol ags D.

b. Why did the United States surpass China in 1890 to become the w r d s l r e t economy? ol agsThe United States benefited from the industrial revolution that was sweeping Western nations at the time while China did not. U.S. economic growth accelerated well beyond Chinese economic growth s ta teUS GPbcm lre ta CiasGP o ht h .. D eae agr hn hn D.

c. E p a nw y C i ai p e i t dt b c m t e w r d sl r e t xli h hn s rdce o eoe h ol ags economy again.China is growing very rapidly, much more rapidly than the United Sae.Gvntevr rpdCieegot,CiasGPi tts ie h ey ai hns rwh hn D s predicted to exceed U.S. GDP in 2015.

d. When Chinab c m st ew r d sl r e te o o y d e t a m a eoe h ol ags cnm, os ht en that the standard of living in China will be higher than in the United States? Explain.N.WieCiasGPwl ece US GP Ciaspplto o hl hn D il xed .. D, hn ouain exceeds the U.S. population by more than 1 billion. S C i a s o hn GDP per person will lag well beyond U.S. GDP per person.

8.

McCain Vows to Retool Training Programs John McCain ... proposed updating the unemployment system and retooling training programs to help people who have lost their jobs particularly older workers adapt to a changing economy. h n ei h r ,a dw i em s o u g i ,s m i d s r e , Cag s ad n hl ot f s an oe nutis companies and workers are forced to struggle with very d f i u tc o c s t eR p b i a p e i e t a c n i a es i ifcl hie, h eulcn rsdnil addt ad as he espoused free-market princip e . u i i ls Bt t s g v r m n j bt h l w r e sg tt ee u a i na dt a n n oenets o o ep okr e h dcto n riig they need for the new jobs that will be created by new businesses i t i n wc n u y M C i a d d H s i f e p o l a e n hs e etr, can de. e ad re epe r t e s r n e t e o o i f r e i t e c u t y [McCain] called h togs cnmc oc n h onr for overhauling the unemployment insurance program so that it can retrain, relocate, and assist workers to find new jobs; replacing a half-dozen outmoded and redundant jobs programs with a single system; drawing on the success of community colleges that he says does a better job than the federal government of giving workers [the] skills they need. The Washington Post, October 9, 2007 a. E p a n t e r t o a e b h n M C i r e x l i h a i n l e i d c a n s f e -market p i c p e a d s a c t a r e p o l a e t e s r n est rnils n tne ht fe epe r h tog eooi frei tecuty cnmc oc n h onr.M .M C i i s r s i gt ei p r a c o t e r c n i i n f r r can s tesn h motne f h peodtos o economic growth, that is, the incentives that will help deliver r p de o o i g o t .T ei e o r e a k tp i c p e m a s a i c n m c r w h h d a f f e -m r e r n i l s e n that property rights are protected and that markets are used to a l c t r s u c s M .M C i c m e ta o t r ep o l a a n loae eore. r cans omn bu fe epe gi refers to the incentive system. Mr. McCain is emphasizing that people need the property rights to invest in human and physical capital and to develop new technologies.

b. Explain how the policies that McCain advocates can encourage greater growth in the changing U.S. economy.M.MCi plce aedsge t ices wres hmn r cans oiis r eind o nrae okr ua capital and make it easier for them to find jobs. For instance,

Mr. McCain suggested retooling training programs and using community colleges to help train (and retrain) workers. These s u c so t a n n i c e s w r e s h m nc p t la dl a t ore f riig nrae okr ua aia n ed o more rapid economic growth. Mr. McCain also suggested relocating and assisting workers to find new jobs. This policy would decrease frictional unemployment, which would increase U.S. real GDP.

9.

Aptera: Road Runner Steve Fambro was sick of people whizzing past him in the carpool lane, so he decided to do something about it. He set out to design a three-wheeled vehicle technically a motorcycle that would make it legal for him to drive alone in that lane and be cozy enough for daily commuting. While researching designs, he realized something important about fuel efficiency: It s all about aerodynamics. By tearing up the rule book, he found a shape that would nearly eliminate wind resistance, thereby reducing by two-thirds the energy needed to move a car. With a ifso o $0mlinfo Ielb Fmr cmay n nuin f 2 ilo rm daa abos opn, Aptera, is scheduled to begin production later this year. The v h c eg t a a e a eo 3 0m l sp rg l o .P i e a eil es n vrg f 0 ie e aln rcd t aon $000 Atr cr aearaysl ot rud 3,0, peas as r led od u. Fortune, April 28, 2008 a. Explain which growth theory best describes the news article.The new growth theory best describes the news article.

b. Use the model explained in this chapter to illustrate your answer to a.The new growth theory stresses the role of choice, innovation, profit, the birth of new firms and the death of old ones. The new growth theory best describes the article because Mr. Fambro choose to innovate a new way vehicle and then formed a company because he saw the possibility of profit. If his three-wheeled vehicle i s c e s u , M . F m r c m a y s a d t m k a s b t n ial s ucsfl r abos opn tns o ae usat profit.

10. I i 2 0 C i a s r a G P i g o i g a 9 p r e t a y a , f n 08 hn el D s rwn t ecn er its population is growing at 1 percent a year, and these growth r t sc n i u ,i w a y a w l C i a sr a G Pp rp r o ae otne n ht er il hn el D e esn be twice what it is in 2008?C i a sr a G Pi g o i at 9 percent a year and its population h n e l D s r w ng is growing at 1 percent a year, so its real GDP per person is growing a 8pretaya.Terl o 7 tlsu ta Ciasra t ecn er h ue f 0 el s ht hn el GPprpro wl dul i 7/ =8 yas S Ciasra D e esn il obe n 08 er. o hn el GDP per person will be twice what it is in 2008 in 2017.

11. If a large increase in investment increases labor productivity, explain what happens to a. Potential GDP.The production function curve shifts upward and equilibrium employment increases, both of which increase potential GDP.

b. Employment.Employment increases. The demand for labor increases, which increases equilibrium employment.

c. The real wage rate.The real wage rate rises. The demand for labor increases, which raises the equilibrium real wage rate.

If a severe drought decreases labor productivity, explain what will happen to d. Potential GDP.The production function curve shifts downward and equilibrium employment decreases, both of which decrease potential GDP.

e. Employment.Employment decreases. The demand for labor decreases, which decreases equilibrium employment.

f. The real wage rate.The real wage rate falls. The demand for labor decreases, which lowers the equilibrium real wage rate.

12. The New New World Order fy u r ac n u e s t i gi P r sa dy u r w t h n I oe osmr itn n ai n oe acig T,i loslk tewrdi cmn t a edsy V t ok ie h ol s oig o n n, as [international grocery store chain] Carrefour executive David S r v r u c n u e si p a e l k C i aa dB a i s m l hie. Bt osmr n lcs ie hn n rzl ipy d n ts ei t a w y W l o et t en w p e a i usly bipolar o e t ht a. ecm o h e, rcro world. While gross domestic product growth is cooling a bit in emerging markets, the results are still tremendous compared with the U.S. and much of Western Europe. The 54 developing markets surveyed by Global Insight will post a 6.7% jump in real GDP this year, down from 7.5% last year. The 31 developed countries will grow an estimated 1.6%. The difference in growth rates represents the largest spread between developed and developing markets in the 37-year history of the survey. Fortune, July 14, 2008 a. E p a n t e i o a w r d t a i r v a e b r c n xli h bplr ol ht s eeld y eet economic growth rates.T e i o a w r d r f e t r l t v l r p dg o t i d v l p n h bplr ol elcs eaiey ai rwh n eeoig economies, 6.7 percent in 2008, versus relatively slow growth in developed economies, 1.6 percent in 2008.

b. Do growth rates over the past few decades indicate that gaps in per capita real GDP around the world are shrinking, growing, or staying the same? Explain.Gaps with a few countries are shrinking but for the most part gaps are remaining more or less the same. The gaps between U.S. real GDP per person and real GDP per person in a few Asian countries, such as Hong King, Singapore, Taiwan, Korea, and China have narrowed sharply over the last 40 years. But the gaps between U.S. real GDP per person and real GDP per person in Canada, Europe, Japan (since 1970), and Central and South America have remained roughly constant over the past decades. And the gap between U.S. real GDP per person and real GDP per person in Africa has widened slightly since 1960.

13. Underinvesting in the Future South Korea, Hong Kong, Taiwan and Singapore have over 40 years averaged roughly the highest consistent economic growth rates

i t ew r d B tc a g t en t o a a c u t n p i c p e n h ol. u hne h ainl conig rnils behind these rosy numbers and a different picture emerges, one that the societies concerned have barely begun to grapple with. In one vital respect these countries (soon to be joined by China) collectively may have the worst record of investment in the future since homo sapiens evolved: Investment in the next generation. They have the lowest fertility rates in the world. ... Economists forget that people as well as buildings depreciate at a roughly predictable rate. Child-rearing is at least as essential as building roads. Imagine if these four economies had invested less in infrastructure and ... more in people. ... They would not be facing a situation in which their work forces unless replaced by immigrants will decline dramatically within 20 years as the population over 65 continues to grow. The payback for years of what may well have been the misallocation of resources is not far in the future. International Herald Tribune, July 7, 2008 a. Explain why the rapid growth rates of these Asian economies mgtb msigaialcto o rsucs ta wl ih e akn msloain f eore ht il result in lower income per person in the future.The new growth theory concludes that population growth increases economic growth because population growth means more people to develop new knowledge and new technologies. The Asian economies are currently growing rapidly but their population growth is extremely slow. The new growth theory predicts that the slow population growth means that in the future their economic growth rates will slow.

b. Explain the difficulties in balancing goals for immediate economic growth and future economic growth.People have a limited amount of time, which they can spend at work, perhaps developing new knowledge or new technology, or at home, raising children. If they spend their time at work, immediate economic growth will be higher than if they spend the time at home. But if they spend their time at home raising children, the future economic growth will be higher as the population growth is higher.

14. I d a s E o o y H t t e W l ni cnm is h al Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation. But stop it has. ... The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment in I d a ss o km r e i f e i g t er p ei f l i g n i t c a k t s l e n , h u e s a l n ,and the sokmre i dw oe 4%fo teya hgs Ms tc akt s on vr 0 rm h ers ih. ot economic forecasts expect growth to slow to 7% big drop for a acutyta nest aclrt got,ntrdc i. onr ht ed o ceeae rwh o eue t India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. ... A plan to build 30 Special Economic Zones is

virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Arclue[s tcnlgclylgad[n]weul giutr i] ehooial agr ad ofly unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the c u t o m , h v b e i n r d A J n 1 r p rt by Goldman orros ae en goe. ue 6 eo S c s J mO N i la dT s a P d a u g sI d at i p o e ah i el n uhr odr re ni o mrv governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use. Business Week, July 1, 2008 Explain five potential sources for faster economic growth in India suggested in this news clip.One suggested source of increased economic growth is increased infrastructure investment. Infrastructure includes factors such as roads, ports, railways, and electricity transmission. Another suggestion is to increase the number of judges, strengthen the legal system, and improve governance. However, while a seemingly simple suggestion, this process is likely to wind up politically q i ed f i u t At i ds g e t o m n i n di t eG l m nS c s ut ifcl. hr ugsin etoe n h oda ah report is to raise education achievement. This suggestion, while not a short-term fix, would be quite powerful at rai i g I d a s sn ni long-term growth. Another source to increase economic growth is to increase productivity in agriculture. This suggestion, however, is not well detailed; in particular, it is much easier to suggest raising productivity than to actually do so. Finally, two possibility related suggestions are to lower inflation and limit government expenditure. Lowering inflation will help make the price system more efficient while reigning in government expenditure will allow more resources to be allocated by the market, which is likely a more efficient mode of allocation.

15. Makani Power: A Might Wind Makani Power aims to generate energy from what are known as high-altitude wind-e t a t o t c n l g e . A dt a a o t xrcin ehoois n hts bu all its 34-year-old Aussie founder, Saul Griffith, wants to s ya o ti .B tM k n c n th d e t r l ,n tw e i s a bu t u aai a ie niey o hn t mrueivso i Gol.r,tetc cmays aqe netr s ogeog h eh opn piatrpcam Mkn pa i t cpueta hlnhoi r. aais ln s o atr ht high-a t t d w n w t a v r o d t o : k t s H r e s n liue id ih ey l ol ie. ansig higher-altitude wind, at least in theory, has greater potential t a t ee i t n w n i d s r at o s n f e a o eg o n , hn h xsig id nuty huad et bv rud wind is stronger and more consistent. Fortune, April 28, 2008 Explain which growth theory best describes the above article.The new growth theory stresses the role of innovation and the birth of new firms and the death of old ones. The new growth theory best describes the article because Mr. Griffith is innovating a new way to generate energy. And if his novel method is successful,

then new firms that exploit this method will be born and old firms that use outdated technology will die.

16. The Productivity Watch According to former Federal Reserve chairman Alan Greenspan, IT investments in the 1990s boosted productivity, which boosted corporate profits, which led to more IT investments, and so on, leading to a nirvana of high growth. Fortune, September 4, 2006 Which of the growth theories that you have studied in this chapter best corresponds to the explanation given by Mr. Greenspan?Mr. Greenspan is describing the new growth theory. According to this theory, economic growth will persist indefinitely because of the perpetual pursuit of profit.

17. Make Way for India The Next China ... China ... [is] growing at around 9 percent a year. ... [Ch n ] o e i a s n -child policy will start to reduce the size of Ciaswrigpplto wti tenx 1 yas Ida hn okn ouain ihn h et 0 er. ni, by contrast, will have an increasing working population for another generation at least. The Independent, 1 March 2006 a. Given the expected population changes, do you think China or India will have the greater economic growth rate? Why?Economic growth occurs because labor productivity grows and because the population grows. If labor productivity grows at the same rate in China as in India, then the more rapid population growth in India will lead to more rapid economic growth in India.

b. W u d C i a s g o t r t r m i a 9 p r e t a y a w t o t ol hn rwh ae ean t ecn er ihu the restriction on its population growth rate?According to the classical theory of economic growth, restricting population growth is necessary for persisting economic growth. According to the new growth theory, restricting population growth l a st s o e e o o i g o t .S w e h rC i a sg o t w u d ed o lwr cnmc rwh o hte hn rwh ol remain at 9 percent a year without restricting population growth is not clear.

c. I d a s p p l t o g o t r t i 1 6 p r e t a y a , a d i ni ouain rwh ae s . ecn er n n 2 0 i se o o i g o t r t w s8p r e tay a .C i a s 05 t cnmc rwh ae a ecn er hn population growth rate is 0.6 percent a year, and in 2005 its economic growth rate was 9 percent a year. In what year will real GDP per person double in each country?I d a sg o t i r a G Pp rp r o e u l 8p r e tay a m n s ni rwh n el D e esn qas ecn er iu 1.6 percent a year, which is 6.4 percent a year. According to the R l o 7 , a t i r t I d a s r a G P p r p r o will double ue f 0 t hs ae ni el D e esn i 7/.,wihi 1. yas S Idasra GPprpro n 064 hc s 09 er. o ni el D e esn will double by 2016. C i a sg o t i r a G Pp rp r o e u l 9p r e tay a m n s hn rwh n el D e esn qas ecn er iu 0.6 percent a year, which is 8.4 percent a year According to the Rule of 70, at this rate C i a s r a G P p r p r o w l d u l hn el D e esn il obe i 7 / . ,w i hi 8 3y a s S C i a sr a G Pp rp r o w l n 084 hc s . er. o hn el D e esn il double in 2014.

18. Is faster economic growth always a good thing? Argue the case for faster growth and the case for slower growth. Then reach a conclusion on whether growth should be increased or slowed.More rapid economic growth brings increased consumption possibilities in the future, which is the benefit from economic growth. Economic growth has costs: Decreased current consumption and the possibility of increased resource depletion and environmental damage. (Of course, the technological change that results from economic growth might allow for less resource depletion and less environmental damage.) Whether economic growth should be increased or decreased depends on the benefits of more rapid growth relative to the costs of more rapid growth.

19. After studying Reading Between the Lines on pp. 556 557 (154-155 in Macroeconomics), answer the following questions: a. What was the growth rate of real GDP in China in the year ended August 2008?Real GDP in China grew at about 10 percent in 2008.

b. Is real GDP per hour of labor in China growing because labor productivity is increasing or only because the population is increasing? How would you determine the contribution of each factor?Real GDP per hour of labor in China is growing because the population is increasing and because labor productivity is increasing. We know that labor productivity must be increasing because population growth alone is insufficient to lead to 10 percent growth. To determine the contribution of population growth and labor productivity on the growth of real GDP per hour of labor, growth accounting must be used. Probably the first step would be to verify whether the one-third rule ap l e t C i a s e o o y pis o hn cnm.

c. With the population growth in both countries at about 1 percent a year, is China narrowing the gap between real GDP per person between China and the United States?Ciasra GPprpro i goiga 9pretaya ad hn el D e esn s rwn t ecn er n U.S. real GDP per person is growing at 1.5 percent per year. The gap between real GDP per person in China and the United States is narrowing.

d. At the current rate of convergence in c, how long will it take for real GDP per person in China to equal that in the United States?C r e t yC i a sr a G P p r p r o i $ a d U S r a G Pp r urnl hn el D e esn s 5 n .. el D e pro i $8 Ciasra GPi goiga 1. pretpr esn s 4. hn el D s rwn t 00 ecn e year and U.S. real GDP is growing at 2.5 percent per year. Population growth is about 1 percent a year in both countries, so real GDP per person is growing at 9 percent per year in China and 1.5 percent per year in the United States. Assuming these growth rates remain constant, and setting t equal to the number of years u t lt e a ee u l C i a sr a G P per person will equal that ni hy r qa, hn el D in the United States when ($5 1.09) t = 31.7 years.

t

= ($48 1.015)

t

so that

20. Use the link on MyEconLab (Chapter Resources, Chapter 23, Web

links) to obtain data on real GDP per person for the United States, China, South Africa, and Mexico since 1960. a. Draw a graph of the data.

The data are on the page after the answers to this question and Figure 6.1 illustrates them. The data are from the Penn World Table, located at http://pwt.econ.upenn.edu/php_site/pwt_index.php.

b. Which country has the lowest real GDP per person and which has the highest?China has the lowest real GDP per person and the United States has the highest.

c. Which country has experienced the fastest growth rate since 1960 and which the slowest?The fastest growth has been experienced by China, which grew at an annual average rate of 10.4 percent. The slowest growth has been experienced by South Africa, which grew at annual average rate of 2.5 percent. Mexico grew at an annual average rate of 3.2 percent and the United States grew at an annual average rate of 4.2 percent.

d. Explain why the growth rates in these four countries are ranked in the order you have discovered.China has the lowest income and is catching up to the United States. Mexico and South Africa have incomes well below the United States and are generally not catching up to the United States. So China displays convergence with U.S. real GDP per person and Mexico and South Africa do not display convergence.

e. Return to the Web site and obtain data for any four other countries that interest you. Describe and explain the patterns that you find for these countries.With a few exceptions, nations that had lower levels of GDP in 1960 grew more rapidly than nations that started with higher levels of real GDP. The exceptions tend to be African nations, especially

those in sub-Sahara. Those countries, even though they started at lower levels of GDP, still grew slowly. South Africa4927.12 5215.07 5488.40 5534.71 5533.75 5744.48 5940.88 6021.08 6259.12 6331.30 6451.87 6531.87 6715.43 6752.00 6627.43 6874.28 7016.30 7162.72 7103.56 7249.51 7578.10 7539.88 7619.62 7826.10 7789.68 7656.84 7423.92 7453.15 7547.70 7690.98 7714.55 7554.46 7268.02 7275.70 7307.98 7336.12 7544.63 7671.14 7696.70 7915.37 8226.06 8447.01 8654.89 8836.35 9145.86

Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

China 448.13 372.07 365.09 383.86 419.66 457.70 481.60 453.66 428.96 461.97 499.77 533.00 534.09 560.73 560.12 588.68 589.45 614.46 669.03 722.57 749.19 797.12 882.62 938.65 1054.91 1131.84 1289.14 1409.58 1486.18 1494.55 1671.90 1791.04 1974.67 2127.92 2451.81 2703.04 2924.77 3230.04 3475.37 3691.26 4001.82 4281.00 4630.424969.64 5332.53

Mexico3718.84 3705.31 3727.21 3951.33 4348.10 4443.62 4566.04 4675.90 4929.78 4967.89 5126.52 5183.52 5444.43 5711.44 5876.80 6053.36 6122.72 6126.62 6454.79 6865.31 7271.13 7718.72 7434.08 6914.38 7007.46 7072.08 6652.99 6595.13 6515.03 6657.91 6864.01 7025.64 7145.61 7147.47 7327.61 6748.19 6948.42 7286.64 7527.49 7700.78 8082.09 7973.76 7926.54 7938.15 8165.22

United States12892.02 12940.68 13568.40 14007.61 14665.62 15492.84 16248.21 16370.62 17072.56 17501.08 17321.48 17792.90 18647.05 19551.84 19207.30 18931.99 19861.88 20652.32 21615.18 22041.69 21606.15 21955.53 21313.55 22154.36 23671.96 24387.45 24951.98 25520.70 26275.36 26927.17 27096.98 26688.35 27342.67 27871.53 28802.88 29248.77 30097.68 31237.96 32297.52 33443.54 34364.50 34162.90 34286.24 34875.37 36098.15