Chapter 25

Production and Growth

Sec00 - Production and Growth
MULTIPLE CHOICE
3. During the past century if the average growth rate of real GDP per person of Vietnam had been 7%, it implies that
it would have doubled, on average, about every
a. 100 years.
b. 70 years.
c. 10 years.
d. 25 years.
ANS: C DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive

10. Which of the following statements is correct?

a. The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a
good gauge of economic progress.
b. The level of real GDP is a good gauge of economic progress, and the growth of real GDP is a good
gauge of economic prosperity.
c. The level of real GDP is a good gauge of economic prosperity, and the level of real GDP per person
is a good gauge of economic progress.
d. The level of real GDP is a good gauge of economic progress, and the level of real GDP per person
is a good gauge of economic prosperity.
ANS: A DIF: 2 REF: 25-0
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive
6. Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If, in the next 100 years,
it doubles every 25 years, then a century from now U.S. real GDP per person will be
a. 4 times higher than it is now.
b. 8 times higher than it is now.
c. 12 times higher than it is now.
d. 16 times higher than it is now.
ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive

Sec01 - Production and Growth - Economic Growth around the World

MULTIPLE CHOICE
5. A nation's standard of living is best measured by its
a. real GDP.
b. real GDP per person.
c. nominal GDP.
d. nominal GDP per person.
ANS: B DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Standard of living
MSC: Interpretive
6. If one wants to know how the material well-being of the average person has changed over time in a given
country, one should look at the
a. level of real GDP.
b. growth rate of nominal GDP.
c. growth rate of real GDP.
d. growth rate of real GDP per person.
ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Standard of living
MSC: Interpretive
7. The level of real GDP person
a. differs widely across countries, but the growth rate of real GDP per person is similar across
countries.
b. is very similar across countries, but the growth rate of real GDP per person differs widely across
countries.
c. and the growth rate of real GDP per person are similar across countries.
d. and the growth rate of real GDP per person vary widely across countries.
ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive
22. Which of the following does the level of real GDP measure?
a. total real income
b. productivity
c. the standard of living
d. All of the above are correct.
ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Real GDP
MSC: Definitional
23. Which of the following is correct?
a. Countries with the highest growth rates over the last 100 years are the ones that had the highest
level of real GDP 100 years ago.
b. Most countries have had little fluctuation around their average growth rates during the past 100
years.
c. The ranking of countries by income changes substantially over time.
d. Over the last 100 years, Japan had the highest real GDP growth rate, and now has the highest real
GDP per person.
ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive
31. Last year real GDP in the imaginary nation of Oceania was 561.0 billion and the population was 2.2 million.
The year before, real GDP was 500.0 billion and the population was 2.0 million. What was the growth rate of
real GDP per person during the year?
a. 12 percent
b. 10 percent
c. 4 percent
d. 2 percent
ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Applicative
37. Which of the following is not correct?
a. Across countries there are large differences in the average income per person. These differences
are reflected in large differences in the quality of life.
b. With a growth rate of about 2 percent per year, average income per person doubles about every 35
years.
c. The ranking of countries by average income changes very little over time.
d. In some countries real income per person has changed very little over many years.
ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Income | Economic growth
MSC: Interpretive

Sec02 - Production and Growth - Productivity: Its Role and Determinants

MULTIPLE CHOICE
1. The one variable that stands out as the most significant explanation of large variations in living standards
around the world is
a. productivity.
b. population.
c. preferences.
d. prices.
ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive
4. Productivity is defined as
a. the amount of difficulty that is involved in producing a given quantity of goods and services.
b. the quantity of labor that is required to produce one unit of goods and services.
c. the quantity of goods and services produced from each unit of labor input.
d. the quantity of goods and services produced over a given amount of time.
ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Productivity
MSC: Definitional
6. Perry accumulated a lot of mathematical skills while in high school, college, and graduate school. Economists
include these skills as part of Perry’s
a. standard of learning.
b. technological knowledge.
c. physical capital.
d. human capital.
ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Human capital
MSC: Definitional
7. What term do economists use to describe the relationship between the quantity of inputs used and the quantity
of output produced?
a. production function
b. input function
c. capital function
d. returns to scale
ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Production function MSC: Definitional
9. Technological knowledge
a. is the same thing as human capital.
b. can be discovered but it can never be kept secret.
c. is a determinant of productivity.
d. does not play a role in the relationship that economists call the production function.
ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Technology
MSC: Interpretive
11. Industrial machinery is an example of
a. a factor of production that in the past was an output from the production process.
b. physical capital.
c. something that influences productivity.
d. All of the above are correct.
ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital | Productivity MSC: Interpretive
13. Despite its status as one of the richest countries in the world, Japan
a. has a very low level of productivity.
b. has few natural resources.
c. has very little human capital.
d. engages in a relatively small amount of international trade.
ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Natural resources
MSC: Interpretive
15. Which of the following statements is correct?
a. By definition, all natural resources are nonrenewable.
b. Market prices give us reason to believe that natural resources are a limit to economic growth.
c. An economy must be blessed with ample quantities of natural resources if it is to be a highly
productive economy.
d. Differences in natural resources can explain some of the differences in standards of living around
the world.
ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Natural resources
MSC: Interpretive
21. In one day Alpha Cabinet Company made 40 cabinets with 320 hours of labor. What was their productivity?
a. 1/8 cabinet per hour
b. 8 hours per cabinet
c. 40 cabinets
d. None of the above is correct.
ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Productivity
MSC: Applicative
27. Workland has a population of 10,000, of whom 7,000 work 8 hours a day to produce a total of 224,000 final
goods. Laborland has a population of 5,000, of whom 4,000 work 12 hours a day to produce a total of 120,000
final goods.
a. Workland has higher productivity and higher real GDP per person than Laborland.
b. Workland has higher productivity but lower real GDP per person than Laborland.
c. Workland has lower productivity but higher real GDP per person than Laborland.
d. Workland has lower productivity and lower real GDP per person than Laborland.
ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Productivity | Real GDP
MSC: Applicative
33. Both Tom and Jerry work 10 hours a day. Tom can produce six baskets of goods per hour while Jerry can
produce four baskets of the same goods per hour. It follows that Tom's
a. productivity is greater than Jerry's.
b. output is greater than Jerry's.
c. standard of living is higher than Jerry's.
d. All of the above are correct.
ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive
41. The key determinant of a the standard of living in a country is
a. the amount of goods and services produced from each hour of a worker's time.
b. the total amount of goods and services produced within the country.
c. the total amount of its physical capital.
d. its growth rate of real GDP.
ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Standard of living | Productivity MSC: Interpretive
47. Which of the following would not be considered physical capital?
a. a new factory building
b. a computer used to help Mercury Delivery Service keep track of its orders
c. on-the-job training
d. a desk used in an accountant's office
ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional
53. Which of the following is human capital?
a. a student loan
b. understanding how to use a company's accounting software
c. training videos for new corporate employees
d. All of the above are correct.
ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional
58. Which of the following would be human capital and physical capital, respectively?
a. for an accounting firm, the accountants’ knowledge of tax laws and computer software
b. for a grocery store, grocery carts and shelving
c. for a school, chalkboard and desks
d. for a library, the building and the reference librarians’ knowledge of the Internet
ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital | Physical capital MSC: Definitional
64. Which of the following is an example of a renewable natural resource?
a. the knowledge possessed by scientists
b. carpenters’ labor services
c. lumber
d. All of the above are correct.
ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources MSC: Definitional
70. In a market economy, the real, or inflation-adjusted, price of a resource measures its
a. contribution to revenue.
b. relative scarcity.
c. productivity.
d. contribution to efficiency.
ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Definitional
79. If a good has become more scarce, then we know for sure that
a. the demand for it increased.
b. the supply of it decreased.
c. either the demand for it increased or the supply of it decreased.
d. both the supply of it and the demand for it decreased.
ANS: C DIF: 3 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Scarcity MSC: Interpretive
87. A management professor discovers a way for corporate management to operate more efficiently. He publishes
his findings in a journal. His findings are
a. proprietary and common knowledge.
b. neither proprietary nor common knowledge.
c. proprietary, but not common, knowledge.
d. common, but not proprietary, knowledge.
ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Definitional
93. Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the population
of both countries was unchanged.
a. It follows that real GDP per person must be higher in Oceania than in Freedonia.
b. It follows that real GDP per person grew faster in Oceania than in Freedonia.
c. It follows that the standard of living must be higher in Oceania than in Freedonia.
d. All of the above are correct.
ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Productivity | Real GDP
MSC: Applicative
99. Which of the following would be considered physical capital?
a. the available knowledge on how to make semiconductors
b. a taxi-cab driver’s knowledge of the fastest routes to take
c. bulldozers, backhoes and other construction equipment
d. All of the above are correct.
ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growthTOP: Physical capital
MSC: Interpretive
105. In a particular production process, if the quantities of all inputs used are increased by 60 percent, then the
quantity of output increases by 60 percent as well. This means that
a. the production process cannot be enhanced by technological advances.
b. no mathematical representation of the relevant production function can be formulated.
c. the relevant production function has the limits-to-growth property.
d. the relevant production function has the constant-returns-to-scale property.
ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Interpretive
111. An economy’s production function has the constant-returns-to-scale property. If the economy’s labor force
doubled and all other inputs stayed the same, then real GDP would
a. stay the same.
b. increase by exactly 50 percent.
c. increase by exactly 100 percent.
d. increase, but not necessarily by either 50 percent or 100 percent.
ANS: D DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Constant returns to scale | Real GDP MSC: Analytical
Scenario 25-1. An economy’s production form takes the form Y = AF(L, K, H, N).
118. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then it is
possible that the specific form of the production function is
a. Y = 4L + 2K + 3H + N
b. Y = (L + K + H + N)/4
c.
Y =2
d.
Y=4
ANS: C DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Analytical

Sec03 - Production and Growth - Economic Growth and Public Policy

MULTIPLE CHOICE
1. “When workers already have a large quantity of capital to use in producing goods and services, giving them an
additional unit of capital increases their productivity only slightly.” This statement
a. represents the traditional view of the production process.
b. is an assertion that capital is subject to diminishing returns.
c. is made under the assumption that the quantities of human capital, natural resources, and
technology are being held constant.
d. All of the above are correct.
ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Diminishing returns
MSC: Interpretive
9. Investment in
a. physical capital, unlike investment in human capital, has an opportunity cost.
b. physical capital, like investment in human capital, has an opportunity cost.
c. human capital is particularly attractive because it involves no externalities.
d. human capital has been shown to be relatively unimportant, relative to investment in physical
capital, for a country’s long-run economic success.
ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Physical capital | Human capital MSC: Interpretive
13. In countries that experience political instability, standards of living tend to be low because of
a. violations of diminishing returns.
b. excessive levels of caloric intake.
c. lack of respect for property rights.
d. attempts by government officials to thwart the catch-up effect.
ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Property rights | Standard of living MSC: Interpretive
18. Accumulating capital
a. requires that society sacrifice consumption goods in the present.
b. allows society to consume more in the present.
c. decreases saving rates.
d. involves no tradeoffs.
ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Capital | Saving
MSC: Interpretive
23. In the long run, an increase in the saving rate
a. doesn’t change the level of productivity or income.
b. raises the levels of both productivity and income.
c. raises the level of productivity but not the level of income.
d. raises the level of income but not the level of productivity.
ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Saving | Productivity
MSC: Interpretive
28. Other things the same, a country that increases its saving rate increases
a. its future productivity and future real GDP.
b. neither its future productivity nor future real GDP.
c. its future productivity, but not its future real GDP.
d. its future real GDP, but not its future productivity.
ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Saving | Productivity
MSC: Interpretive
33. Other things equal, relatively poor countries tend to grow
a. slower than relatively rich countries; this is called the poverty trap.
b. slower than relatively rich countries; this is called the fall-behind effect.
c. faster than relatively rich countries; this is called the catch-up effect.
d. faster than relatively rich countries; this is called the constant-returns-to-scale effect.
ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Catch-up effect
MSC: Definitional
38. Which of the following best describes the response of output as time passes to an increase in the saving rate?
a. The growth rate of output does not change.
b. The growth rate of output increases and gets even larger as time passes.
c. The growth rate of output increases and does not change as time passes.
d. The growth rate of output increases, but diminishes to its former level as time passes.
ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Saving | Diminishing returns
MSC: Interpretive
43. On a production function, as capital per worker increases, output per worker
a. increases. This increase is larger at larger values of capital per worker.
b. increases. This increase is smaller at larger values of capital per worker.
c. decreases. This decrease is larger at larger value of capital per worker.
d. decreases. This decrease is smaller at larger value of capital per worker.
ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Diminishing returns MSC: Interpretive
51. If an American-based firm opens and operates a new watch factory in Panama, then it is engaging in
a. foreign portfolio investment.
b. foreign financial investment.
c. foreign direct investment.
d. indirect foreign investment.
ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance TOP: Foreign investment
MSC: Definitional
57. The opening of a new American-owned factory in Egypt would tend to increase Egypt's GDP more than it
increases Egypt's GNP because
a. some of the income from the factory accrues to people who do not live in Egypt.
b. gross domestic product is income earned within a country by both residents and nonresidents,
whereas gross national product is the income earned by residents of a country while producing both
at home and abroad.
c. all of the income from the factory is included in Egypt's GDP.
d. All of the above are correct.
ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: International trade and finance
TOP: Foreign investment | Gross domestic product | Gross national product
MSC: Applicative
64. Which of the following is generally an opportunity cost of investment in human capital?
a. future job security
b. forgone present wages
c. increased earning potential
d. All of the above are correct.
ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Human capital
MSC: Interpretive
74. Inward-oriented policies
a. include imposing tariffs and other trade restrictions.
b. have generally increased productivity and growth in the countries that pursued them.
c. promote the production of goods and services that the country produces most efficiently.
d. All of the above are correct.
ANS: A DIF: 1 REF: 25-3
TOP: Trade policy MSC: Definitional
79. When a country removes trade barriers and imports toys and exports farm machinery,
a. its growth slows.
b. its productivity decreases.
c. it is essentially transforming farm machinery into toys.
d. its economic well-being decreases while that of the country that sells toys increases.
ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Trade policy
MSC: Applicative
85. Inventors often obtain patents on new products and processes, thereby turning new ideas into
a. private goods and increasing the incentive to engage in research.
b. private goods but decreasing the incentive to engage in research.
c. public goods and increasing the incentive to engage in research.
d. public goods but decreasing the incentive to engage in research.
ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: The Study of Economics, and definitions of economics
TOP: Private goods MSC: Applicative
94. On the basis of theory and empirical evidence, economists have reached several conclusions about economic
growth. Which of the following is not one of these conclusions?
a. A relatively simple way to increase growth rates permanently is to increase a country's saving rate.
b. Growth is generally inhibited rather than promoted by policies like protective tariffs.
c. Well-established property rights that are enforced by fair and efficient courts are important to
economic growth.
d. Countries with few domestic natural resources still have opportunities for economic growth.
ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive
95. All else equal, which of the following would tend to cause real GDP per person to rise?
a. a change from outward-oriented policies to inward-oriented policies
b. an increase in investment in human capital
c. a weakening of property rights
d. All of the above are correct.
ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Interpretive
100. The Economic Development Minister of a country has a list of things she thinks may explain her country's low
growth of real GDP per person relative to other countries. She asks you to pick the one you think most likely
explains her country's low growth. Which of the following contributes to low growth?
a. poorly enforced property rights
b. outward-oriented trade policies
c. policies that permit foreign investment
d. All of the above are correct.
ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Economic growth
MSC: Applicative
105. All else equal, if there are diminishing returns, then which of the following is true if a country increases its
capital by one unit?
a. Output will rise by more than it did when the previous unit was added.
b. Output will rise but by less than it did when the previous unit was added.
c. Output will fall by more than it did when the previous unit was added.
d. Output will fall but by less then it did when the previous unit was added.
ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Diminishing returns
MSC: Interpretive
111. Electronics firms may be able to get patents on their ideas. Doing so makes their ideas
a. private goods rather than public goods. This gives people more incentive to engage in research.
b. private goods rather than public goods. This gives people less incentive to engage in research.
c. public goods rather than private goods. This gives people more incentive to engage in research.
d. public goods rather than private goods. This gives people more incentive to engage in private
research.
ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growthTOP: Private goods | Public goods
MSC: Interpretive
115. By saving more, a country
a. has more resources for capital goods. The increase in capital raises productivity.
b. has more resources for capital goods. The increase in capital reduces productivity.
c. has fewer resources for capital goods. The decrease in capital raises productivity.
d. has fewer resources for capital goods. The decrease in capital reduces productivity.
ANS: A DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growthTOP: Saving | Productivity
MSC: Interpretive