Chapter 18: Quiz Answers -- Economic Growth and Productivity

1. Which of the following is not an example of extensive growth?
   discovery of a new way to harness solar energy. Discovering a new way to use solar energy would be an example of intensive growth because it involves technological progress. The other examples are ones in which the resource base is simply extended without any change in technology.

2. Suppose that three workers can produce $150 worth of toy tractors in one hour. Labor productivity is
   $50. Labor productivity is typically defined as output per hour of labor input. If three hours of labor produce $150 worth of toy tractors, then one hour of labor would (on average) produce $150/3 = $50 of such goods.

3. Suppose that economic growth is 6%, labor hours grow 4%, and the capital stock grows 8%. Labor and capital split national income equally. The growth rate of multifactor productivity is
   0%. Recall that multifactor productivity growth is the residual.
   %change A = (%change Y) - (a x %change L) - ((1-a) x %change K). Given,
   %change A = 6% - (0.5 x 4%) - (0.5 x 8%), then
   %change A = 0%.
   In other words, changes in capital and labor inputs fully account for the increase in output.

4. The economist named Thomas Malthus tagged economics as the "Dismal Science" because
   he believed that diminishing marginal returns to land productivity would lead to mass poverty and starvation. As the best agricultural land was used up and the marginal productivity of the land decreased, the potential for the nation to feed its growing population would fall.

5. Labor productivity is procyclical because
   all of the above. If labor productivity is procyclical, the implication is that workers are more productive on average during expansions and less productive during contractions. Labor hoarding explains part of this procyclical trend. Firms are reluctant to scale down their labor force by as much as the decline in output because rehiring and retraining workers is costly when business picks back up. Implicitly or explicitly, firms do ask workers to be more productive during an expansion because the labor input tends to grow more slowly than the output.

6. Capital productivity could increase for all of the following reasons except
   an increase in the capital stock. An increase in the capital stock by itself does not increase capital productivity. An increase in the productivity of that capital is needed. This increase may occur because either the quantity or quality of labor inputs are increasing or because technological advancement is improving the capital.

7. Multifactor productivity growth is
   growth due to technological change, broadly defined. Multifactor productivity growth (MFP) is not a weighted average of the growth in resource inputs. In fact MFP is the residual in growth after accounting for the growth in resource inputs.

8. Which government policy would likely lead to higher long run economic growth?
   Indexing the capital gains tax to inflation so that the real capital gains tax falls. A reduction in the "real" capital gains tax to avoid the inflation portion of the tax might spur saving and investment and, hence, increase economic growth. A reduction in the sales tax and an increase in the income tax might actually slow long-run growth because such a change would encourage spending at the expense of work. At the margin people may choose to spend more because of the lower sales tax and work less to avoid higher income taxes. Larger government spending and an increase in the money supply may increase short-run growth, but they will do little to spur long-run growth.

9. The Rule of 69 works not just for GDP per capita but for any growth rate.
   True. This rule is a generic one; it apples to any item that is growing at a compounded rate. Population growth is an example.

10. Multifactor productivity is a better measure of increases in the standard of living of workers. The advantage of labor productivity, on the other hand, is that it helps to isolate technological change.
    False. The reverse definitions are more accurate. Multifactor productivity isolates technological change while labor productivity is a better measure of the increases in workers' standards of living.