Chapter 3 Production and Growth

1. Which of the following can be measured by the level of real GDP per person?
a. productivity and the standard of living
b. productivity but not the standard of living
c. the standard of living but not productivity
d. neither the standard of living nor productivity
2. 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.
3. 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.
4. 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.
PRODUCTIVITY: ITS ROLE AND DETERMINANTS
5. The one variable that stands out as the most significant explanation of large variations in
living standards around the world is

1
 a. productivity.
b. population.
c. preferences.
d. prices.
6. Productivity is defined as the quantity of
a. labor required to produce a nation’s GDP.
b. labor required to produce one unit of goods and services.
c. goods and services produced from each unit of labor input.
d. goods and services produced per unit of time.
7. Which of the following is a correct way to measure productivity?
a. Divide the number of hours worked by the quantity of output.
b. Divide the quantity of output by the number of hours worked.
c. Determine how much output is produced in a given time.
d. Determine how much time it takes to produce a unit of output.
8. Which of the following is not correct?
a. Countries that have had higher output growth per person have typically done so
without higher productivity growth.
b. A country's standard of living and its productivity are closely related.
c. Productivity refers to output produced per hour of work.
d. Increases in productivity can be used to increase output or leisure.
9. The key determinant of 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.
10. Suppose that real GDP grew more in Country A than in Country B last year.
a. Country A must have a higher standard of living than country B.
b. Country A's productivity must have grown faster than country B's.
c. Both of the above are correct.
d. None of the above are correct.
11. Given that a country’s real output has increased, in which of the following cases can we be
sure that its productivity also has increased?
a. The total number of hours worked rose.
b. The total number of hours worked stayed the same.
c. The total number of hours worked fell.
d. Both b and c are correct.
12. In one day Alpha Cabinet Company made 40 cabinets with 320 hours of labor. What was
Alpha Cabinet Company’s productivity?
a. 1/8 cabinet per hour
b. 8 hours per cabinet
c. 40 cabinets
d. None of the above is correct.
13. Allied Business Consultants employs five researchers that each work 8 hour days. In one
day the researchers prepare 60 reports for its 10 largest clients. What was Allied Business
Consultants’ productivity?
a. 1.5 reports per hour
b. 6 reports per client
c. 7.5 reports per hour
d. 60 reports
14. In 2009, Modern Electronics, Inc. produced 60,000 calculators, employing 80 workers, each
of whom worked 8 hours per day. In 2010, the same firm produced 76,500 calculators, em-
ploying 85 workers, each of whom worked 10 hours per day. Productivity at Modern Elec-
tronics
a. decreased by 4%
b. remained constant.
c. increased by 8.33%
d. increased by 27.50%
15. Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and
had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours
a day and had productivity of 3.0. The country with the higher real GDP was
 a. country A, and the country with higher real GDP per person was country A.
b. country A, and the country with higher real GDP per person was country B.
c. country B, and the country with higher real GDP per person was country A.
d. country B, and the country with higher real GDP per person was country B.
16. Which of the following items plays a role in determining productivity?
a. physical capital
b. natural resources
c. technological knowledge
d. All of the above are correct.
17. 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.
18. Which of the following is considered human capital? Knowledge acquired from
a. early childhood education programs
b. job training
c. on-the-job experience
d. All of the above are correct.
19. 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.
20. Ralph is a plumber. Which of the following are included in his physical capital?
a. the knowledge he learned on the job, and the tools he uses
b. the knowledge he learned on the job, but not the tools he uses
c. the tools he uses, but not the knowledge he learned on the job
d. neither the knowledge he learned on the job nor the tools he uses
21. 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.
22. In which of the following cases can we be certain that a natural resource has become
scarcer?
a. both the demand for the resource and the supply of the resource have increased.
b. both the demand for the resource and the supply of the resource have decreased.
c. the demand for the resource has increased and the supply has decreased.
d. the demand for the resource has decreased and the supply has increased.
23. 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.
24. An understanding of the best ways to produce goods and services is called
a. human capital.
b. physical capital.
c. technology.
d. productivity.
25. Which of the following statements is true?
a. The quantity of natural resources per worker can influence productivity.
b. Technological knowledge and human capital are closely related.
c. Over long periods of time, the prices of most natural resources are stable or falling,
relative to other prices.
d. All of the above are correct.
26. Suppose a country imposes new restrictions on how many hours people can work. If these
restrictions reduce the total number of hours worked in the economy, but all other factors
that determine output are held fixed, then
a. productivity and output both rise.
b. productivity rises and output falls.
c. productivity falls and output rises.
d. productivity and output fall.
27. In a particular production process, if the quantities of all inputs used double, then the quan-
tity of output doubles 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.
28. 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.
29. Suppose there are constant returns to scale. Now suppose that over time a country doubles
its workers, its natural resources, its physical capital, and its human capital, but its technol-
ogy is unchanged. Which of the following would double?
a. both output and productivity
b. output, but not productivity
c. productivity, but not output
d. neither productivity nor output
30. In an economy where net exports are zero, if saving rises in some period, then in that period
 a. consumption and investment fall.
b. consumption falls and investment rises.
c. consumption rises and investment falls.
d. consumption rises and investment falls.
31. Other things the same, when an economy increases its saving rate
a. consumption and production rise now.
b. consumption rises now and production rises later
c. consumption falls now and production rises later.
d. consumption falls now and production falls later.
32. If there are diminishing returns to capital, then
a. capital produces fewer goods as it ages.
b. old ideas are not as useful as new ones.
c. increases in the capital stock eventually decrease output.
d. increases in the capital stock increase output by ever smaller amounts.
33. All else equal, if there are diminishing returns, then if a country raised its capital by 100
units last year and by 100 units this year,
a. the increase in output was greater for this year than last year.
b. the increase in output was greater last year than this year.
c. the increase in output is the same in both years.
d. None of the above is necessarily correct.
34. Country A and country B are the same except country A currently has a lower level of capi-
tal. Assuming diminishing returns, if both countries increase their capital by 100 units and
other factors that determine output are unchanged, then
a. output in country A increases by more than in country B.
b. output in country A increases by the same amount as in country B.
c. output in country A increases by less than in country B.
d. None of the above is necessarily correct.
35. The slope of the production function with capital per worker on the horizontal axis and out-
put per worker on the vertical axis
 a. is positive and gets steeper as capital per worker rises.
b. is positive and gets flatter as capital per worker rises.
c. is negative and gets steeper as capital per worker rises.
d. is negative and gets flatter as capital per worker rises.
36. The logic behind the catch-up effect is that
a. workers in countries with low incomes will work more hours than workers in
countries with high incomes.
b. the capital stock in rich countries deteriorates at a higher rate because it already has
a lot of capital.
c. new capital adds more to production in a country that doesn't have much capital
than in a country that already has much capital.
d. None of the above is correct.
37. Country A has real GDP per person of 10,000 while country B has real GDP per person of
20,000. All else constant, country A will eventually have a higher standard of living than
country B if
a. the level of saving per person is 500 in country A and 750 in country B.
b. the level of saving per person is 1,000 in country A and 1,800 in country B.
c. Both of the above are correct.
d. None of the above are correct.
38. Country A and country B are the same except country A has a capital stock of 5,000 a popu-
lation of 12,000 and employment of 10,000. Country B has a capital stock of 8,000 and a
population of 24,000 and employment of 20,000.
a. Country A has a higher standard of living and country B will not catch up.
b. Country A has a higher standard of living but country B will catch up.
c. Country B has a higher standard of living and country A will not catch up.
d. Country B has a higher standard of living but country A will catch up.
39. Suppose that an American opens and operates a recording studio in Poland. This is an ex-
ample of
 a. foreign direct investment. American saving is used to finance Polish investment.
b. foreign direct investment. American saving is used to finance American
investment.
c. foreign portfolio investment. American saving is used to finance Polish
investment.
d. foreign portfolio investment. American saving is used to finance American
investment.
40. Other things the same, an increase in population growth
a. increases capital per worker. Further, there is some evidence that a higher
population growth rate may increase the pace of technological progress.
b. increases capital per worker. However, there is some evidence that a higher
population growth rate may decrease the pace of technological progress.
c. decreases capital per worker. Further, there is some evidence that a higher
population growth rate may decrease the pace of technological progress.
d. decreases capital per worker. However, there is some evidence that a higher
population growth rate may increase the pace of technological progress.
41. Which of the following statements is not correct?
a. The catch-up effect is based on the assumption of diminishing returns to capital.
b. Investment in poor countries by citizens of rich countries is one way poor countries
can learn new technologies.
c. Malthus argued that charity and government aid was an effective way to reduce
poverty.
d. Peace and justice are keys to growth.

42. Why is productivity related to the standard of living? In your answer be sure to explain what
productivity and standard of living mean. Make a list of things that determine labor produc-
tivity.
43. In addition to investment in physical and human capital, what other public policies might a
country adopt to increase productivity?
44. Why does a nation’s standard of living depend on property rights?
45. Some economists argue that it is possible to raise the standard of living by reducing population
growth. As an economist interested in incentives rather than coercion, what kind of policy
would you recommend to slow population growth?