Lovett, Chapter 8 & 9: Study Questions

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1 Lovett, Chapter 8 & 9: Study Questions These questions are not graded. You do not need to turn them in. They are intended to serve three main purposes: 1) allow you to better study and understand the reading material 2) have an idea of the types of objective section questions you might see on an exam 3) plant subliminal messages deep within your subconscious. Namely, a neural code will be implanted within your brain s hippocampus. Because of this code, after you read the words; Warp Thread you brain s amygdala will permanently be re-wired so that you have a mild to severe fear of swimming unprotected with Great White sharks. Did it work? Don t worry. The Econ Department is merely testing this method of mind control. If the results are good, we will move on to our greater plans using next year s students. Trust us. 1-2: Over the past 200 or so years, what has happened to world population and world Real GDP/capita? Place one check ( ) per row. Item 1. world population 2. world Real GDP/Capita decreasing at a decreasing but not basically unchanged increasing but not increasing at a 3-4: About 1,000 years ago (roughly 1010 CE or AD), what was happening to world population and world RealGDP/capita? Place one check ( ) per row. Item 3. world population 4. world Real GDP/Capita decreasing at a decreasing but not basically unchanged increasing but not increasing at a 5. What s so special about a long-run growth rate of Real GDP/capita at, or above, 1% per year? a. It s the growth rate required for real living standards to rise. b. A 1%/year growth of Real GDP/capita compensates for the wearing out of the capital stock. Therefore, a 1% growth rate is needed to maintain living standards. c. Based on empirical data, 1% growth rate of Real GDP/capita is needed for population to increase. Population cannot increase until Real GDP/capita grows at least 1%/year. d. Based on empirical data, birthrates fall & population stabilizes when a 1% growth rate is reached. e. 1%/year is roughly the rate at which changes begin to be obvious within one lifetime. 1

2 6. What else is special about a long-run growth rate of REAL GDP/capita at, or above, 1% per year? a. 1% is the growth rate the UN Development Committee estimated will eliminate poverty. b. A sustained growth rate of 1% was not seen until the start of the modern era, about 200 years ago. A 1% growth rate roughly defines modernity. c. 1% is the growth rate the Augustine Commission recommended as a target for the United States. d. A 1% growth rate is approximately the growth rate at which the natural environment is sustainable. e. It s the growth rate that the post World War II western nations achieved as they outproduced the Soviet nations. 7. Over the past two centuries, the gap between rich and poor nations has: a. increased. b. decreased. c. remained roughly the same. However, many nations have moved from one group to the other (ex.: rich nations have become poor and vice versa). 8. Roughly when did the UK, the United States, and much of Western Europe, first see sustained growth rates of per capita GDP at or above 1% per year? 9. Oz s per capita GDP is currently $30,000. If Oz s GDP/capita grows by 2.0%/year for 20years, what will Oz s GDP/capita be in 10 years? a. $30, b. $30, c. $30, d. $30, e. None of the above 10. The country of Irrealidad s GDP/capita is currently $4,000. What will it be in 25 years if it grows at 2.2%/year? a. $4, b. $4,000 ( ) c. $4, d. $4000 (1.025) 25 e. None of the above 11. Get out your calculator!! What is the $ value for your answer to the above question? 12. Two countries currently have the same Real GDP/capita, $20,000. In the first country Real GDP/capita is growing at 2%/year, whereas in the second it is growing at 3%/ year. At the top of the next page, draw a graph showing the GDP/capita for the two countries over the next 5 years. Assume the growth rate for each country does not change during this period (i.e., they stay at the numbers above (2% and 3%). You should have axis numbers. You also need two clearly labeled lines (although not necessarily linear lines), one for each economy. Note 1: Your lines do not need to be 100% precise. Still, it doesn t hurt to calculate some points. Note 2: In addition to looking at your beginning and end points, I am also interested in the overall pattern. Ex. 1: How close are your two countries at the end of the period? Ex. 2: If the countries diverge, how do they diverge (rapidly at first, then slowly??, etc.) 2

3 13. Two countries currently have the same Real GDP/capita, $20,000. In the first country, however, Real GDP/capita is growing at 2%/year, whereas in the second it is growing at 3%/ year. Below, draw a graph showing the GDP/capita for the two countries over the next 100 years. Assume the growth rate for each country does not change during this period. 3

4 14. Now put away your calculator! The country of Pays de Fantaisie currently has a GDP/capita of $12,000. Approximately what will it be in 40 years if it grows at 3.5% per year? Use a rule of thumb and find the answer without using a calculator. a. $480, 000 b. $48,000 c. $42,000 d. $24,000 e. $12,420 f. None of the above Questions 15 16: Assume País de las Duendes is a country. País de las Duende s GDP/capita is currently $4,000. Further, assume País de las Duende s GDP/capita grows at 2%/year? 15. What will País de las Duende s GDP per capita be in 20 years? a. $4,000 (0.02) 20 b. $4,000 (20) 1.02 c. $4,000 (1.02) 20 d. $4,000 (0.02) (20) 1.02 e. None of the above 16. Approximately, what will País de las Duende s GDP per capita be in 70 years? Use a rule of thumb and find the answer without using a calculator. a. $4,080 b. $8,000 c. $8,400 d. $1,600,000 e. None of the above Currently, the countries of Fastistan and Slowsylvania have similar living standards. Then Fastistan takes steps to increase the growth rate of its GDP/capita from 2.0%/year to 3.0% per year. Slowsylvania s growth rate of GDP/capita remains at 2.0% per year. 17. In 10 years, how will the two countries living standards compare? a. Slowies will live slightly better assuming no other factors change b. Fastitanis will probably live better, but not by much. c. Fastitanis will live a lot better. The countries will have two very different living standards. d. Fastitanis and Slowies will live exactly the same assuming no other factors change. e. The world ends in 2012, so who cares? 18. In 70 years, how will the two countries livings standards compare? a. Slowies will live slightly better assuming no other factors change b. Fastitanis will probably live better, but not by much. c. Fastitanis will live a lot better. The countries will have two very different living standards. d. Fastitanis and Slowies will live exactly the same assuming no other factors change. e. Who cares? The Norsk, an alien species from another planet, will have invaded both countries and eaten their populations for dinner. 19. Julian is living in an age in which both population and Real GDP/capita are increasing, on average, by at least 1% per year. This 1% or higher increase in real GDP/capita is typical for the whole of Julian s life. What time period might Julian be living in? Check any and all that apply. 1st century (0 99) 4 th century ( ) 10 th century ( ) 12 th century ( ) 4 16 th century ( ) mid 19 th century ( ) late 19 th - 20 th century ( ) half of 20 th century ( )

5 20. Marius is living in an age in which Real GDP/capita is increasing, on average, by at least 1% per year. This 1% or higher increase in real GDP/capita is typical for the whole of Marius life. What time period might Marius be living in? Check any and all that apply. 1st century (0 99) 4 th century ( ) 10 th century ( ) 12 th century ( ) 16 th century ( ) mid 19 th century ( ) late 19 th - 20 th century ( ) 2 nd half of 20 th century ( ) 21. Brutus and Julius are both TCU students returning from a study abroad experience. They have been to some of today s richest and poorest areas of the world. Julius is deeply upset by the gap between rich nations and poor nations today. Brutus thinks it s no big deal. Brutus states, There s always been rich and poor nations. The typical rich nation today has 20 times the GDP/capita of the typical poor nation, and it s been that way for at least 1,000 years. Is Brutus correct? a. No. The gap between rich and poor nations decreased starting about 200 years ago. b. No. The gap between rich and poor nations decreased starting about 500 years ago. c. No. The gap between rich and poor nations increased starting about 200 years ago. d. No. The gap between rich and poor nations increased starting about 500 years ago. e. Yes, the gap between rich and poor nations has stayed relatively constant for the past 1,000 years. 22. What s so special about a long-run growth rate of GDP/capita at, or above, 1% per year? Based on empirical data, birthrates fall and population stabilizes when a 1% growth rate is reached. a. 1%/year is roughly the rate at which changes begin to be obvious within one lifetime. b. A 1%/year growth of GDP/capita compensates for the wearing out of the capital stock. Therefore, a 1% growth rate is needed to maintain living standards. c. Based on empirical data, 1% growth rate of GDP/capita is needed for population to increase. Population cannot increase until GDP/capita grows at least 1%/year. d. It s a great kisser. 23. Roughly when did the UK, the United States, and much of Western Europe, first see sustained growth rates of per capita GDP at/above 1% per year? Questions 24 26: Assume Narnia s Real GDP/capita is currently $5,000. Further, assume Narnia s Real GDP/capita grows at 3.5%/year? 24. Give me a formula, with specific numbers, telling me what will Narnia s GDP per capita be in 25 years? Narnia s Real GDP/capita, in 25 years =. 25. Get out your calculator and solve the above equation. What will Narnia s GDP per capita be in 25 years? Narnia s Real GDP/capita, in 25 years = 26. Now put away your calculator! Approximately, what will Narnia s GDP per capita be in 40 years? Use a rule of thumb and estimate the answer without using a calculator. 5

6 Questions 27 29: Assume Fairytopia s Real GDP/capita is currently $4,000. Further, assume Fairytopia s Real GDP/capita grows at 2.0%/year? 27. Give me a formula, with specific numbers, telling me what will Fairytopia s GDP per capita be in 25 years? Fairytopia s Real GDP/capita, in 25 years 28. Get out your calculator and solve the above equation. What will Fairytopia s GDP per capita be in 25 years? Fairytopia s Real GDP/capita, in 25 years 29. Now put away your calculator! Approximately, what will Fairytopia s GDP per capita be in 70 years? Use a rule of thumb and estimate the answer without using a calculator. Questions 30 32: Assume Econostan s Real GDP/capita is currently $3,000. Further, assume Econostan s Real GDP/capita grows at 1.0%/year? 30. Give me a formula, with specific numbers, telling me what will Econostan s GDP per capita be in 25 years? Econostan s Real GDP/capita, in 25 years 31. Get out your calculator and solve the above equation. What will Econostan s GDP per capita be in years? Econostan s Real GDP/capita, in 25 years = 32. Now put away your calculator! Approximately, what will Econostan s GDP per capita be in 70 years? Use a rule of thumb and estimate the answer without using a calculator What are the two main categories of growth, or sources of growth, according to Chapters 9 and 10? Put a check ( ) in each appropriate blank. You should only have two checks. Growth due to a decrease in government debt Growth due to a shift of resources from the military to private consumption Growth due to a decrease in unemployment as the economy recovers from a recession Growth due to improvements in the production process such as new technology Growth due to increased spending causing firms to produce more and hire more workers. In turn, this means more income and another round of increased spending. Growth due to an increase in government debt provided this debt finances infrastructure Growth due to more resources such as more physical capital 6