Question.3105 - Chapter 25 2. When and where did modern economic growth first happen? What are the major institutional factors that form the foundation for modern economic growth? What do they have in common? 4. What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve. 7. True or false? If false, explain why. a. Technological advance, which to date has played a relatively small role in U.S. economic growth, is destined to play a more important role in the future. b. Many public capital goods are complementary to private capital goods. c. Immigration has slowed economic growth in the United States. Problems 1. Suppose an economy’s real GDP is $30,000 in year 1 and $31,200 in year 2. What is the growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2. What is the growth rate of real GDP per capita? 3. Assume that a “leader country” has real GDP per capita of $40,000, whereas a “follower country” has real GDP per capita of $20,000. Next suppose that the growth of real GDP per capita falls to zero percent in the leader country and rises to 7 percent in the follower country. If these rates continue for long periods of time, how many years will it take for the follower country to catch up to the living standard of the leader country? Chapter 26 Questions 1. What are the four phases of the business cycle? How long do business cycles last? Why does the business cycle affect output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables? 5. Why is it difficult to distinguish between frictional, structural, and cyclical unemployment? Why is unemployment an economic problem? What are the consequences of a negative GDP gap? What are the noneconomic effects of unemployment? 8. Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a negative GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP? What is core inflation? Why is it calculated? Problems 2. Assume the following data for a country : total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? What is the official unemployment rate? 3. Suppose that the natural rate of unemployment in a particular year is 5 percent and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? 4. If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year’s rate of inflation? What term do economists use to describe this second outcome?
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Ans 1) The modern economic growth first happened in Netherlands in the 17 th century. The main source of their earnings were trading and fishing. A huge chunk of money was invested in setting up of industries. Some of these industries were traditional and some were new. Some of these industries were namely; textiles, munitions, soap boiling, sugar refining, tobacco curing, glass, and diamond cutting. The setting up of these industries to develop the demand of financial institutions for efficiently handling the money generated from enterprises that spurred. Thus the Bank of Amsterdam was established in 1609. This was the first of its kind in North West Europe and was based on the operating model of Bank of Venice. The setup helped the businessmen to get loans at lower interest rates. The Dutch also created the stock market where commodities were traded. They also evolved futures market for commodities where traders could trade commodities for future as well. Ans 2) The four supply factors are the quantity and quality of natural resources; the quantity and quality of human resources; the stock of capital goods; and the level of technology. The demand factor is the level of purchases needed to maintain full employment. The efficiency factor refers to both productive and allocating efficiency. The above figure illustrates these growth factors by showing movement from curve AB to curve CD. Ans 3) a) The first part is false because technology has played the most important role in U.S. economic growth of any growth factor. However, the second part of the statement is probably true. b) True c) False. Immigration has been a source for an expanded labor force and also for expansion in aggregate demand. Ans 4) Growth rate of real GDP = 4 percent (= $31,200 - $30,000)/$30,000). GDP per capita in year 1 = $300 (= $30,000/100). GDP per capita in year 2 = $305.88 (= $31,200/102). Growth rate of GDP per capita is 1.96 percent = ($305.88 - $300)/300). Ans 5) Applying the rule of 70 we have the number of years to double GDP = (70/growth rate) The leader country has current GDP of $ 40000 and since the growth rate is 0, it will stay the same. But the follower country has a GDP of $ 20000 and the growth rate is 7% Thus to reach the level of leader country the follower country has to double its current GDP. Thus the time needed is (70/7) or 10 years. Ans 6) The four phases of a typical business cycle, starting at the bottom, are trough, recovery, peak, and recession. The length of a complete cycle varies from about 2 to 3 years to as long as 15 years. There is a pre-Christmas spurt in production and sales and a January slackening. This normal seasonal variation does not signal boom or recession. From decade to decade, the long-term trend (the secular trend) of the U.S. economy has been upward. A period of no GDP growth thus does not mean all is normal, but that the economy is operating below its trend growth of output. Because capital goods and durable goods last, purchases can be postponed. This may happen when a recession is forecast. Capital and durable goods industries therefore suffer large output declines during recessions. In contrast, consumers cannot long postpone the buying of nondurables such as food; therefore recessions only slightly reduce nondurable output. Also, capital and durable goods expenditures tend to be lumpy. Usually, a large expenditure is needed to purchase them, and this shrinks to zero after purchase is made. Ans 7) It is not easy to distinguish between these three types of unemployment because the sum of frictional and structural unemployment is itself changing, thus it is difficult to determine the full employment unemployment rate. For example, a person who quits a job in search of a better one would normally be considered frictionally unemployed. But suppose the former job then disappears completely because the firm is in a declining industry and can no longer make money. Our still jobless worker could now be considered structurally unemployed. And then suppose the economy slips into a severe recession so that our worker cannot find any job and has become cyclically unemployed. The sum of frictional and structural unemployment fluctuates as the labor force structure changes. In other words, there is no automatic label on the type of unemployment when someone is counted as unemployed. Unemployment is an economic problem because of the concept of opportunity cost. Quite apart from any idea of consideration for others, unemployment is economic waste: A unit of labor resource that could be engaged in production is sitting idle. The “GDP gap” is the difference between what the economy could produce at its potential GDP and what it is producing, its actual GDP. The consequence of a negative GDP gap is that what is not produced – the amount represented by the gap—is lost forever. Moreover, to the extent that this lost production represents capital goods, the potential production for the future is impaired. Future economic growth will be less. The noneconomic effects of unemployment include the sense of failure created in parents and in their children, the feeling of being useless to society, of no longer belonging. Ans 8) Demand-pull inflation occurs when prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output. It is sometimes expressed as “too much spending chasing too few goods. Cost-push inflation describes prices rising because of increases in per unit costs of production. Cost-push inflation is most likely to be associated with a negative GDP gap, as the rising production costs reduce spending and output. Demand-pull inflation is more likely to occur with a positive GDP gap, because actual GDP will exceed its potential only when aggregate spending is strong and rising. As the economy produces its potential, bottlenecks and more sever resource scarcity occur, driving up prices. Core Inflation is a measure of inflation that excludes certain items that face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation. Ans 9) Labor force = 500 - (120 + 150) = 230 Official unemployment rate (unemployed / labor force) = (23 / 230) = 10% Ans 10) GDP gap = (9% - 5%) x 2 = 8% Forgone output estimated at (8% of $500 billion) = $40 billion Ans 11) This year's rate of inflation = (121 - 110) / 110 = 10% This year's rate of inflation = (108 - 110) / 110 = -1.82% A negative rate of inflation is referred to as "deflation"More Articles From Economics
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