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9 ECONOMIC GROWTH*

K e y C o n c e p t s

Long-Term Growth Trends

♦ Over the past 100 years, growth in real GDP per person in the United States has averaged 2 percent per year. The growth rate varies from one period to the next. It slowed between 1973 and 1983 and has since increased.

♦ A few rich nations are catching up to the U.S. level of real GDP per person.

♦ Many poor nations are not catching up, but Hong Kong, Korea, Singapore, and Taiwan are generally growing more rapidly than the United States and so they are catching up. China also is catching up but from a long way behind.

The Causes of Economic Growth: A First Look

Three institutions are the basic precondition for eco-nomic growth:

♦ Markets — enable buyers and sellers to conduct transactions. They also convey information (in the form of prices) that create incentives for people to change their quantities demanded and supplied.

♦ Property rights — social arrangements that govern the ownership, use, and disposal of productive re-sources and goods and services.

♦ Monetary exchange — facilitates buying and selling of goods and services.

* This is Chapter 25 in Economics.

Markets, property rights, and monetary exchange create incentives to specialize. For growth to continue, incen-tives are needed to pursue three crucial activities:

♦ Saving and investment in new capital — the accu-mulation of capital adds to the nation’s productiv-ity and level of output.

♦ Investment in human capital — human capital, the skills and talents people possess, is a key ingredient for economic growth. Much human capital is ac-quired through education; some is obtained through doing the same task over and over.

♦ Discovery of new technologies — technological advancement is crucial to economic growth.

Growth Accounting

Growth accounting is a tool used to calculate the quantitative contribution to real GDP growth of each of its components, growth in labor and capital and technological change. The aggregate production function shows that the quantity of real GDP supplied is determined by em-ployment, capital, and technology. Labor productivity is real GDP per hour of labor; it equals real GDP divided by aggregate labor hours. Pro-ductivity growth slowed after 1973 and has speeded up after 1983. Growth accounting divides growth in productivity into two components:

♦ Growth in capital per hours of labor, and

♦ Technological change.

C h a p t e r

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The productivity curve is a relationship that shows how real GDP per hour of labor varies as the amount of capital per hour of labor changes with no change in technology. Figure 9.1 shows two productivity curves.

♦ An increase in the amount of capital per hour of labor leads to a movement along a productivity curve, as shown in Figure 9.1 by the movement from point a to point b on PC0.

♦ An increase in technology shifts the productivity curve upward, as shown in the figure by the shift f from PC0 to PC1.

The law of diminishing returns states that as the quantity of one input increases with the quantities of the other inputs remaining the same, output increases but by increasingly smaller amounts. The one third rule states that on the average a 1 percent increase in capital per hour of labor yields a one third of 1 percent increase in real GDP per hour of labor. The one-third rule divides growth in productivity into growth result-ing from increases in capital per hour of labor and growth resulting from advances in technology. The one-third rule and productivity curve show that the slowdown in productivity growth between 1973 and 1983 occurred because technological change was offsetting negative shocks to productivity.

♦ From 1973 to 1983, technological change contrib-uted very little to productivity growth.

♦ After 1983, technological change’s contribution to growth in productivity resumed, but at a slower pace than in the 1960s.

Two factors accounted for the slowdown between 1973 and 1983:

♦ Energy price shocks — the price of oil skyrocketed in the 1970s, so research and development was re-directed toward technologies designed to conserve energy.

♦ Environmental protection laws — new capital was used to protect the environment. This protection is not counted as output, so although the quality of life improves, real GDP does not increase.

Policies for increasing the economic growth rate are:

♦ Stimulate saving — tax incentives could be directed at increasing saving.

♦ Stimulate research and development — inventions can be copied, so government subsidies can lead to more inventions that spread throughout the econ-omy.

♦ Target high-technology industries — by encourag-ing such industries, a country temporarily can earn above-average profits.

♦ Encourage international trade — free international trade encourages economic growth because free trade extracts all the possible gains from specializa-tion and exchange.

♦ Improve the quality of education — education creates benefits beyond the ones enjoyed by the students who receive education, so without gov-ernment action, too little education is provided.

Growth Theories

Three theories of economic growth are classical, neoclas-sical, and new growth.

The classical growth theory is the view that real GDP growth is temporary and that when real GDP per per-son rises above subsistence level, a population explosion eventually brings real GDP per person back to the sub-sistence level.

♦ As productivity increases, income per person rises, which causes the population growth rate to increase.

♦ The increase in population increases labor supply, which drives the real wage rate back to the subsis-

E C O N O M I C G R O W T H 1 3 7

tence real wage rate, the minimum real wage rate necessary to maintain life.

♦ Economic growth ceases until new technological change occurs.

♦ Even if capital growth occurs, anything (including capital growth) that raises real GDP per hour of la-bor above the subsistence level leads to a popula-tion explosion that eventually forces real GDP per hour of labor back to the subsistence level.

Contrary to the classical theory assumption, the popu-lation growth rate is approximately independent of the economic growth rate. The neoclassical growth theory stresses that real GDP per person grows because technological changes in-crease saving and investment so that capital per hour of labor grows. Technological change is determined by factors outside the model, such as luck.

♦ In Figure 9.2, the initial productivity curve is PC0 and technological change shifts the productivity

curve upward to PC1. The economy moves from point a to point b.

♦ At point b the productivity curve is steep so the real interest rate exceeds the target rate of return. As a result, more saving occurs, which increases capital per hour of labor from $30 to $45 and the econ-omy moves from point b to point c.

♦ At point c the real interest rate equals the target rate of return and so economic growth ceases.

One difficulty with the neoclassical model is that it predicts all nations will converge to the same level of per capita income. The new growth theory is based on the idea that tech-nological change results from the choices that people make in the pursuit of profit. Four facts about market economies are important:

♦ Discoveries result from people’s choices, such as whether to look for something new and, if so, how intensively to look.

♦ A new discovery brings the discovered high profits but eventually competitors emerge and the above-average profit is competed away.

♦ Discoveries can be used by everyone without reduc-ing their availability to others, so the benefits from a new discovery spread everywhere.

♦ Knowledge is not subject to the law of diminishing returns so the incentive to innovate new and better products and production methods never decreases.

Economic growth occurs because of innovation in technology and capital growth.

♦ A technological advance occurs and the productiv-ity curve shifts upward. The real interest rate is above the target rate of return so capital growth oc-curs. People’s incomes rise.

♦ The rise in income increases consumption demand, so more innovation occurs and the productivity curve continues to shift higher. The real interest rate remains above the target rate of return and the economy grows indefinitely as long as innovation in new technology takes place.

H e l p f u l H i n t s

1. THE ONE-THIRD RULE : The one-third rule is used to divide economic growth into growth result-ing from increases in capital per hour of labor and growth resulting from advances in technology. The basic idea is that is impossible to directly measure growth resulting from technological innovations. So, the growth attributed to technology is the growth that cannot be attributed to increases in capital. The one-third rule says that the economic growth resulting from growth in capital per hour of labor equals one third of the growth in capital per hour of labor. Subtract this calculated growth from the actual economic growth rate to obtain the growth resulting from technological advances.

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2. CLASSICAL VERSUS NEW GROWTH THEORY : Eco-nomics is sometimes called the “dismal science.” This nickname came about because of the classical growth theory. The main conclusion from the clas-sical approach is that, in the long run, workers are bound to earn only a subsistence wage, a truly dis-mal result!

The fact that the classical model of growth was developed right at the beginning of the industrial revolution is ironic. The classical model focuses on population growth and does not allow for continu-ing technological change and capital growth, two features of the industrial revolution that were to become an increasingly important aspect of our world. It is these omissions that account for the dismal, subsistence-wage conclusion of the classical model.

New growth theory examines the factors that lead to technological change. In this theory, economic growth can persist indefinitely because the incen-tive to accumulate more capital persists indefi-nitely. Perhaps the nickname for economics should be changed, to the “happy science”!

Q u e s t i o n s

True/False and Explain

Long-Term Growth Trends

11. Over the past 100 years, real GDP per person in the United States has grown at an average rate of 5 percent per year.

12. Because real GDP per person is highest in the United States, over the past 30 years economic growth has been most rapid in the United States.

The Causes of Economic Growth: A First Look

13. Once a nation has in place markets, property rights, and monetary exchange, economic growth is inevitable.

14. Discovery of new technologies helps generate eco-nomic growth.

Growth Accounting

15. An increase in the amount of capital per hour of labor shifts the productivity curve upward.

16. The law of diminishing returns states that as more capital is used, total output produced diminishes.

17. Productivity growth slowed between 1973 and 1983 because capital per hour of labor did not grow during this period.

18. Energy price hikes are one of the causes of the pro-ductivity growth slowdown.

19. Limiting the extent of international trade increases the economic growth rate.

Growth Theories

10. An assumption of the classical growth theory is that an increase in real wages and incomes increase the population growth rate.

11. A subsistence real wage is the minimum real wage necessary to sustain life.

12. In the neoclassical theory of growth, a technologi-cal advance can create perpetual economic growth.

13. The neoclassical growth theory stresses the role played by people’s incentives for discovering new technology.

14. In the new theory of economic growth, economic growth can continue indefinitely.

Multiple Choice

Long-Term Growth Trends

11. For the last 100 years in the United States, growth in real GDP per person a. has averaged 2 percent per year. b. has accelerated in the last half century because of

the technological revolution. c. was never negative for any year. d. has averaged about 8 percent per year.

12. Which of the following best describes the facts? a. Almost all rich and poor nations are catching up

to the level of U.S. GDP per person. b. Almost all rich nations are growing fast enough

to catch up to the level of U.S. GDP per person, but virtually no poor nation is growing fast enough to catch up.

c. Some rich and some poor nations are catching up to the level of U.S. GDP per person, but many poor nations are not catching up.

d. No nation is growing fast enough to catch up to the level of U.S. GDP per person.

E C O N O M I C G R O W T H 1 3 9

The Causes of Economic Growth: A First Look

13. Which of the following is NOT a source of eco-nomic growth? a. Saving and investment in new capital b. The productivity curve c. Investment in human capital d. Discovery of new technologies

Growth Accounting

14. Growth accounting divides changes in productivity into changes resulting from a. markets and property rights. b. saving and investment. c. capital per hour of labor and technology. d. human capital and other capital.

15. An increase in the amount of capital per hour of labor leads to a. an upward shift in the productivity curve. b. a downward shift in the productivity curve. c. a movement along the productivity curve to a

higher level of output per hour of labor. d. a movement along the productivity curve to a

lower level of output per hour of labor.

16. Technological advancement leads to a. an upward shift in the productivity curve. b. a downward shift in the productivity curve. c. a movement along the productivity curve to a

higher level of output per hour of labor. d. a movement along the productivity curve to a

lower level of output per hour of labor.

17. The law of diminishing returns a. holds that additional workers produce less addi-

tional output. b. applies only to labor and not to capital. c. explains why the productivity curve shifts up-

ward when technology increases. d. does not apply to labor.

18. The one-third rule states that a. one third of all technology helps replace capital

per hour of labor. b. an increase in productivity can be traced to one

third of the firms in the nation. c. a 1 percent increase in capital per hour of labor

creates a 3 percent increase in productivity. d. a 1 percent increase in capital per hour of labor

creates a 1/3 percent increase in productivity.

19. Suppose that capital per hour of labor increases by 30 percent and that real GDP per hour of labor increases by 18 percent. The increase in capital per hour of labor increased real GDP per hour of labor by ____. a. 30 percent b. 18 percent c. 10 percent d. 8 percent

10. Suppose that capital per hour of labor increases by 30 percent while real GDP per hour of labor in-creases by 18 percent. The change in technology increased real GDP per hour of labor by ____. a. 30 percent b. 18 percent c. 10 percent d. 8 percent

11. When did productivity grow most rapidly? a. 1963 to 1973 b. 1973 to 1983 c. 1983 to 1997 d. 1963 to 1983

12. Helping create the 1973-1983 slowdown in produc-tivity growth was a. a large increase in capital per hour of labor. b. large increases in the price of oil. c. passing fewer environmental protection laws. d. All of the above helped create the slowdown in

productivity growth.

13. Economic growth can be increased by a. taxing savings. b. limiting international trade. c. using government funds to help finance basic

research. d. decreasing the length of time for which a patent

is effective.

Growth Theories

14. An assumption of the classical growth theory is that

a. the population growth rate increases when real GDP per person increases.

b. saving is more important than investment in determining economic growth.

c. capital plays a major role in determining how rapidly the economy grows.

d. human capital is the ultimate cause of economic growth.

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15. A factor that turned out to be a weakness of the classical theory of growth is its a. emphasis on saving and investment. b. assumption that the growth rate of the popula-

tion increases when income increases. c. reliance on constant growth in technology. d. neglect of the subsistence real wage.

16. In the neoclassical theory of growth, growth in ____ is the result of luck.

a. saving b. income c. technology d. the real interest rate

17. If the real interest rate exceeds the target interest rate, saving is ____ and capital per hour of labor ____. a. high; increases b. high; decreases c. low; increases d. low; decreases

18. A key assumption of new growth theory is that a. all technological change is the result of luck. b. higher incomes lead to a higher birth rate. c. a successful innovator has the opportunity to

earn a temporary, above-average profit. d. the target interest rate is lower than the real in-

terest rate.

19. Which theory of economic growth concludes that in the long run people will be paid only a subsistence real wage? a. The classical theory b. The neoclassical theory c. The new theory d. All of the theories

20. Which theory of economic growth concludes that growth can continue indefinitely? a. The classical theory b. The neoclassical theory c. The new theory d. All of the theories

Short Answer Problems

1. a. In 2004 real GDP per person in the nation of Slow is $2,000 and is growing at the rate of 1 percent per year. After 1 year, what is real GDP per person? After 2 years? After 10 years? After 30 years?

b. In 2004 real GDP per person in Fast is half of that in Slow, $1,000, but is growing at the rate of 3 percent per year. After 1 year, what is real GDP per person? After 2 years? After 10 years? After 30 years?

c. Initially the ratio of GDP per person in Fast to GDP per person in Slow is 0.50. What is the ratio after 1 year? After 30 years?

2. What are the three basic preconditions for eco-nomic growth? Explain the role that each plays in promoting economic growth. Are these precondi-tions sufficient for economic growth to continue forever? Why or why not?

3. a. In Figure 9.3 illustrate a productivity curve that

shows this situation: When capital per hour of labor is $30 then $20 of real GDP per hour of labor will be produced. Label this point a.

b. In Figure 9.3 show what happens to the amount of real GDP per hour of labor when the amount of capital per hour of labor increases from $30 to $60. After the increase in capital per hour of labor, what is the new amount of

E C O N O M I C G R O W T H 1 4 1

real GDP per hour of labor? (Use the one-third rule.)

c. In Figure 9.3 show what happens to the productivity curve when new technology is developed.

4. Would the slowdown in productivity growth in the United States have been as large if real GDP in-cluded the value of improving the environment? Explain your answer.

5. Igor was recently named economic minister. His first assigned task is to predict his nation’s long-term growth prospects. Igor expects that capital per hour of labor will grow at 1 percent per year. Moreover, he expects technological change of 1 percent per year. What productivity growth rate will Igor predict?

6. After Igor announces his prediction from question 8, the nation’s president suggests to Igor that Igor’s current position will be short-lived unless produc-tivity growth picks up. Igor likes his current job because it involves no night work and very little digging. What government policies to speed up growth might Igor suggest and why?

7. Why can’t a high level of GDP per person persist in classical growth theory? In particular, what mechanism drives the economy back to the situa-tion in which workers receive only a subsistence wage?

8. Figure 9.4 best shows the situation in which the productivity curves constantly shift upward. This figure best illustrates which theory of economic growth? Why?

You’re the Teacher

1. “This is a really great chapter, but you know, there’s one thing that puzzles me just a bit. I just don’t get the relationship between the saving sup-ply curve, which we talked about in the last chap-ter, and the amount of capital per hour of labor, which we talked about in this chapter. I know these things have to be related, but I just can’t see how and it’s really bugging me!” Help debug your friend by explaining the relationship between the two.

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A n s w e r s

True/False Answers

Long-Term Growth Trends

11. F Real GDP growth per person has averaged 2 percent per year, not 5 percent.

12. F Other nations have grown more rapidly and these nations are catching up to the level of GDP per person in the United States.

The Causes of Economic Growth: A First Look

13. F Markets, property rights, and monetary ex-change are necessary for economic growth, but they do not guarantee that it will occur.

14. T The discovery of new technologies is a key method of creating growth in GDP per person.

Growth Accounting

15. F An increase in the quantity of capital per hour of labor causes a movement along a productivity curve, not a shift in the function.

16. F The law of diminishing returns states that as more capital is used the additional output pro-duced diminishes.

17. F The main cause of the productivity growth slowdown was the failure of technological change to contribute to increasing productivity.

18. T As a result of massive hikes in the price of en-ergy, technological development was devoted to reducing the amount of energy used in produc-tion rather than increasing overall productivity.

19. F Allowing unhindered international trade is good economic growth policy because nations that do so generally grow more rapidly than nations that restrict international trade.

Growth Theories

10. T The data, however, show that increases in real wages and incomes is associated with little change in the population growth rate.

11. T The question gives the definition of the subsis-tence real wage, the real wage rate that the classi-cal growth theory predicted would occur.

12. F In the neoclassical theory, a technological ad-vance raises real GDP but does not create persist economic growth.

13. F The neoclassical growth theory stresses the role played by saving and investment; the new growth theory emphasizes people’s incentives.

14. T Economic growth can persist forever because the return from knowledge does not diminish.

Multiple Choice Answers

Long-Term Growth Trends

11. a Over the last 100 years, growth in real GDP per person in the United States has averaged 2 per-cent per year.

12. c If a nation grows more rapidly than the United States, eventually that nation’s level of GDP per person will catch up to that in the United States.

The Causes of Economic Growth: A First Look

13. b The productivity curve can illustrate economic growth, but it is not a source of growth.

Growth Accounting

14. c Growth accounting is used to divide changes in productivity into different factors so that the fac-tors responsible for growth can be identified.

15. c An increase in capital per hour of labor causes a movement along the productivity curve.

16. a Technological advances shift the productivity curve upward.

17. a Answer (a) is the law of diminishing returns applied to labor.

18. d Answer (d) states the one-third rule. 19. c The one-third rule states that the increase in real

GDP per hour of labor from the increase in capital per hour of labor is (1/3) × (30 percent), or 10 percent.

10. d Based on the answer to question 9, the increase in capital per hour of labor raised productivity by 10 percent, leaving technology to account for the remaining 8 percent.

11. a Between 1963 and 1973, rapid technological progress shifted the productivity curve upward and productivity growth was high.

12. b Energy prices jumped upward and so research was devoted to saving energy rather than increas-ing productivity.

13. c Private markets will allocate too few funds to basic research because an inventor’s profit can be limited by copying the inventions.

E C O N O M I C G R O W T H 1 4 3

Growth Theories

14. a This assumption is important because it leads to the (dismal!) conclusion that people are paid only a subsistence wage.

15. b The previous answer pointed out the importance of the assumption that population growth in-creases when income increases. However, this as-sumption is a weakness because the data show it to be false: Population growth does not change when income increases.

16. c Technological growth is the driving force behind economic growth in the neoclassical theory. However, because technological growth depends on chance and luck in this approach, the neo-classical model advanced no reasons for the oc-currence of technological growth.

17. a When the real interest rate exceeds the target interest rate, people save more than usual and the supply of capital increases.

18. c The opportunity to earn an above-average profit gives innovators the incentive to develop new technologies.

19. a This long-run conclusion of the classical theory was based on the (faulty!) assumption that the population growth rate rises when income in-creases.

20. c Only in the new theory can economic growth continue forever as the natural course of the economy.

Answers to Short Answer Problems

1. a. After 1 year, real GDP per person in Slow is ($2,000.00)(1.01) or $2,020.00. After 2 years,

real GDP per person in is ($2,000.00)( . )101 2 or

$2,040.20. Similarly, after 10 years real GDP per person is $2,209.24 and after 30 years is $2,695.70.

b. Real GDP per person in Fast after 1 year is $1,030.00; after 2 years is $1,060.90; after 10 years is $1,343.92; after 30 years is $2,427.26.

c. After 1 year the ratio of real GDP per person in Fast to real GDP per person in Slow is equal to $1,030.00/$2,020.00 = 0.51. After 30 years the ratio is $2,427.26/$2,695.70 = 0.90. By grow-ing more rapidly than Slow, the nation of Fast has been able to close a large part of the gap in the GDP per person. In other words, by grow-

ing more rapidly than the (advanced) nation of Slow, the (poorer) nation of Fast is able to catch up to the (higher) level of GDP in Slow. In fact, after these 30 years, the level of GDP in Fast will equal that in Slow in less than 6 more years!

2. Three necessary preconditions for economic growth are markets, property rights, and monetary ex-change. Markets enable people to buy and sell at low cost and markets create and convey important information in the form of prices. Monetary ex-change also facilitates buying and selling. Markets and monetary exchange help promote specializa-tion, which can vastly increase the amount of goods and services produced. Secure property rights are a key to specialization. Without secure property rights, people would be less willing to specialize be-cause what they produce might be taken from them without their deriving any personal benefit from it. In this case, people likely would not specialize.

These preconditions are not sufficient for growth to continue forever. To have persistent growth, saving, investing in new capital (both physical and human), and developing new technologies must occur. Without the necessary three preconditions, saving, investing, and developing new technologies will not occur. But simply having the three preconditions in place is no guarantee that saving, investing, and de-veloping new technologies will occur.

3. a. Figure 9.5 shows the initial productivity curve,

PC0, going through point a.

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b. An increase in the amount of capital per hour from $30 to $60 results in a movement along

productivity curve PC0 from point a (real GDP of $20 per hour) to point b. The increase in capital per hour is 100 percent. Thus the one-third rule states that real GDP per hour of labor will increase by one third of 100 percent, or 33 percent. The new level of real GDP per hour of labor is $26.67.

c. An increase in technology shifts the productiv-ity curve upward. This shift is from productiv-

ity curve PC0 to the new productivity curve

PC0.

4. No, the slowdown in productivity growth would not have been as large. One of the reasons for the slowdown was that the value of an improved envi-ronment is not included in real GDP. During the 1970s, investment often was aimed at reducing pol-lution. If the benefit of the resulting cleaner envi-ronment had been included, real GDP would have been larger and, as a result, productivity, which equals real GDP divided by aggregate hours of work, also would have been larger.

5. Use the one-third rule to predict the productivity growth rate: Capital per hour of labor is growing at 1 percent and will contribute productivity growth of 1/3 percent. Technological change contributes another 1 percent, so Igor will predict that total productivity growth will be 1 1/3 percent.

6. Igor can suggest five policies. First, he can recom-mend that his nation stimulate saving by using tax incentives. By increasing saving, his country can in-crease its growth rate of capital per hour. Second, Igor can recommend that the government subsidize research and development. Research and develop-ment will spur technological advances. Third, Igor can propose a government policy of targeting high-tech industries with, say, favorable tax treatment. This policy also should translate into more rapid

technological growth. Fourth, Igor can recommend encouraging international trade. Finally, Igor can suggest that his nation undertake policies to im-prove the quality and increase the quantity of edu-cation.

7. High levels of real GDP per person do not persist in classical growth theory because an assumption of classical growth theory is that population growth is directly related to people’s real wage or real income. In particular, an increase in productivity raises peo-ple’s real wage. Real GDP per person increases. But in response to the higher real wage, the classical theory holds that the population growth rate in-creases. As a result, the supply of labor increases, which depresses the real wage. As long as the real wage is above the subsistence real wage, population growth remains rapid and the real wage ultimately is driven back to its subsistence level. A high level of real GDP per person is only temporary.

8. The figure best describes the new growth theory because it shows the productivity curve persistently shifting upward. Only the new growth theory con-cludes that technological advances will constantly occur so only the new growth theory predicts that economic growth can persist indefinitely.

You’re the Teacher

1. “You know, I had to think about this subject a bit myself, and then I finally figured out what’s going on. The amount of capital per hour of labor basi-cally gives us the amount of capital in the econ-omy. Saving is the additional new capital. Saving goes to increasing the quantity of capital. So if we save more, maybe because the real interest rate ex-ceeds the target rate of return, then we increase our capital more so that the amount of capital per hour of labor increases.”

E C O N O M I C G R O W T H 1 4 5

C h a p t e r Q u i z

11. Over the last 100 years, U.S. economic growth per person has averaged about ____ percent per year. a. 15 b. 10 c. 5 d. 2

12. For the past decade, among Canada, Germany, and the United States, the nation with the highest GDP per person has been ____ and Japan grew ____ rapidly than this nation. a. Canada; less b. the United States; more c. Germany; less d. the United States; less

13. Markets, property rights, and monetary exchange a. guarantee that economic growth will occur. b. are unrelated to economic growth. c. lead nations to trade with each other. d. are needed for economic growth to occur, but do

not guarantee that growth takes place.

14. Continuing economic growth requires a. investment in human capital. b. saving and investment in new capital. c. technological progress. d. All of the above.

15. The purpose of growth accounting is to a. estimate the productivity curve for the United

States b. verify the one-third rule. c. measure how much economic growth is the re-

sult of technological progress, increased labor, and increased capital.

d. determine whether the United States is saving and investing enough in new capital.

16. A movement along a productivity curve occurs when a. technological progress takes place. b. the amount of capital and labor grow by the

same proportion. c. the amount of capital grows more rapidly than

the amount of labor. d. the amount of output per hour of labor does not

change.

17. The slope of the productivity curve reflects the a. effects of capital accumulation. b. effects of technological progress. c. law of diminishing returns. d. effects of population growth.

18. Capital per hour of labor rises by 6 percent and technology has increased output per hour of labor by 9 percent. Hence the total increase in output per hour of labor equals a. 15 percent. b. 11 percent. c. 9 percent. d. None of the above.

19. The new theory of economic growth assumes that a. the supply of labor increases whenever the wage

rate exceeds the subsistence level. b. technological change is the result of luck. c. knowledge does not have diminishing returns. d. people save as long as the real interest rate is less

than the target interest rate.

10. Which theory of economic growth predicts that nations eventually converge to the same level of real GDP per person? a. The classical theory. b. The neoclassical theory. c. The new theory of economic growth. d. None of the theories makes this prediction.

The answers for this Chapter Quiz are on page 293

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