Chapter 1

Economic Growth: An Introduction to Scarcity and Choice

True/False Questions
1. Since 1973, the growth rate of per capita GDP in the U.S. has been lower than it was in previous
periods.
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'. &he three pri(ar) resources are land, labor, and capital.
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3. &he production possibilities curve shows the (a*i(u( co(binations of goods and services that
can be produced b) an econo() when une(plo)(ent is below the natural rate.
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,. ll points on or below the production possibilities curve are attainable.
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-. &he econo(ic decisions that influence growth are those that increase capital and i(prove
technolog).
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.. /t pa)s to increase the production of capital goods if the (arginal cost of the production decision
e*ceeds the (arginal benefit.
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7. /t is alwa)s better for the econo() to e*perience econo(ic growth.
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0. s resources are transferred fro( production of truc1s to the production of co(puters, (arginal
cost of co(puters decreases.
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9. &echnological i(prove(ent allows (ore output to be obtained fro( a given level of inputs,
thereb) shifting the production possibilities curve to the right.
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12. &he decline in the growth of capital intensit) in the United States has been caused largel) b) a
rapid increase in labor inputs in addition to slow growth in capital inputs.
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11. &he best co(bination of goods and services is being produced when (arginal cost and (arginal
benefit are e3ual.
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1
&est 4an1 '
1'. /ncreases in resources, technological i(prove(ent, and efficienc) i(prove(ent are all potential
sources of econo(ic growth.
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13. Growth based on capital accu(ulation can be (ore costl) than growth based on efficienc)
i(prove(ent.
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1,. 5o(pensation per hour has grown at about the sa(e rate as productivit).
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1-. &he growth of labor productivit) is caused b) the growth of capital relative to labor and b)
technological and efficienc) i(prove(ents.
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1.. &he use of infor(ation technolog) 6/&7 capital services grew at al(ost '2 percent per )ear fro(
199- to 1999.
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17. Productivit) per hour in 8apan is al(ost twice as large as productivit) per hour in the United
States.
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10. Productivit) growth rates in 8apan and #urope are greater than the productivit) growth rate in the
United States.
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19. Per capita GDP in 8apan e*ceeds per capita GDP in #urope because 8apanese e(plo)ees wor1
(ore hours.
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'2. ccording to 9addison, the structural effect, the technological diffusion effect, and the foreign
trade effect all help to e*plain the rapid growth in productivit) in 8apan and #urope.
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'1. &he technological diffusion effect refers to shifting resources fro( one sector to another in an
econo().
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''. &he foreign trade effect refers to the increase in (onopol) power that has occurred in s(all
countries since "orld "ar //.
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'3. &echnolog) catch up offers an advantage to toda):s developing countries.
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',. &he best technolog) for producing popcorn and tractors is the one that re3uires the (ost resources
to produce a given co(bination of popcorn and tractors.
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&est 4an1 3
'-. 5orrelations between high levels of econo(ic freedo( and high standards of living prove that
econo(ic freedo( causes prosperit).
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'.. ccording to so(e econo(ists, low ta*es, free (ar1ets and price stabilit) pro(ote econo(ic
growth.
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'7. da( S(iths view of the political econo() in 177. was in direct contrast to the view set forth b)
&ho(as 8efferson in the Declaration of /ndependence.
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'0. &he large invest(ent in hu(an capital b) #ast sian countries (a) be one reason the) have
e*perienced rapid inco(e growth.
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MultipleChoice Questions
1. "hich of the following was authored b) da( S(ith;
a. Declaration of Independence
b. Principles of Economics
c. The Wealth of Nations
d. The Academic Scribblers
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'. "hich of the following state(ents does !<& describe 5hina=s econo(ic growth over the last '2
)ears%
a. 9illions have escaped absolute povert) in 5hina over the last '2 )ears.
b. 9ore people (anaged to escape dire povert) during this period than in an) other '2>)ear
period in histor).
c. Despite growth, people in 5hina had less to eat and had fewer of life=s necessities in 1991 than
in 1970.
d. d?usted for inflation, per capita GDP increased over three ti(es fro( 1970 to 199-.
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3. &he econo() in the U.S.%
a. has recentl) been growing at a slower rate than it has since 10'2.
b. has recentl) been growing at a faster rate that it has since 10'2.
c. has recentl) had a (uch higher growth rate than 8apan and @orea.
d. has recentl) e*perienced annual growth rates of over - percent.
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,. "hich state(ent is +AS#;
a. 4raBil has been successful at closing its econo(ic gap with the United States.
b. &he growth rates of per capita GDP in the U.S. and in 8apan have slowed in the )ears since
1973.
c. 5hina=s per capita GDP growth has dra(aticall) increased since 1973.
d. Since 1992, the U.S. has gained a growth advantage over 8apan.
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, 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
-. #cono(ic stagnation has beco(e a concern because%
a. growth rates in industrialiBed countries have declined significantl) over the 1973 > 1992 ti(e
period.
b. &hird "orld countries have e*perienced e*tre(el) high growth rates since 197'.
c. growth rates in &hird "orld countries have declined significantl) over the 1973 > 1992 ti(e
period.
d. growth rates in all countries have stagnated since 197'.
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.. &he U.S. growth rates for the 1992>99 has%
a. increased co(pared to 1973>92 period.
b. decreased co(pared to1973>92 period.
c. has re(ained the sa(e as that of 1973>92 period.
d. has stagnated at low rates.
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7. &he three pri(ar) resources are%
a. land, labor, and stoc1s.
b. land, labor, and capital.
c. land, capital, and e3uip(ent.
d. land, labor, and entrepreneurship.
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0. 5apital resources consist of%
a. land and ph)sical capital.
b. ph)sical and hu(an capital.
c. land and hu(an capital.
d. labor and hu(an capital.
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9. $esources found in nature, such as land, water, forests, (ineral deposits, and air are%
a. land.
b. labor.
c. capital.
d. natural resources.
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12. #fforts and services of people in production of goods and services are%
a. land
b. labor.
c. capital.
d. hu(an capital.
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11. 9an>(ade, durable ite(s used in the production processes are%
a. land.
b. labor.
c. capital.
d. e3uip(ent.
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&est 4an1 -
1'. production possibilities curve shows%
a. the (a*i(u( co(binations of two goods or services that can be produced when resources are
full) used and the best technolog) is e(plo)ed.
b. the (ini(u( co(binations of two goods or services that can be produced when resources are
full) used and the best technolog) is e(plo)ed.
c. the (a*i(u( co(binations of two goods or services that can be produced when the
une(plo)(ent rate in the econo() is not above . percent.
d. the (a*i(u( co(binations of two goods or services that can be produced when the econo()
is at the trough of the business c)cle.
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13. /n an econo() that produces onl) popcorn and tractors, which state(ent best describes the
opportunit) cost of an additional tractor;
a. &he purchase price of the new tractor.
b. &he value of the popcorn that (ust be given up so that the tractor (a) be produced.
c. &he purchase price of one unit of popcorn.
d. &he value of the tractor gained (inus the value of the popcorn given up.
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1,. &he best technolog) is%
a. the technolog) that is cutting>edge technolog).
b. the technolog) that will (a*i(iBe a business:s average cost of production.
c. the technolog) that is the (ost diffused throughout the econo().
d. the technolog) that re3uires the fewest resources to produce a good.
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1-. /f an econo() is currentl) producing at the point where (arginal benefit and (arginal cost are
e3ual, we 1now that%
a. the best technolog) is not being used.
b. the econo() should change its allocation of resources.
c. une(plo)(ent e*ists in the econo().
d. the best co(bination of goods and services is being produced.
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1.. /n a world of scarcit)%
a. if we want to produce (ore of one good, we have to produce less of so(ething else.
b. there is no li(it to what can be produced.
c. the (arginal cost of additional units of a good declines as (ore of the good is produced.
d. we can have it allD
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17. "hich of the following state(ents is correct;
a. /t is desirable to invest in (ore capital goods for future econo(ic growth onl) if the (arginal
benefit of the invest(ent e*ceeds the (arginal cost.
b. &he (arginal benefit of capital goods will increase as (ore capital goods are produced.
c. /n order to produce capital goods, (ore consu(ption goods (ust be produced in the present.
d. s additional units of capital goods are produced, the (arginal productivit) of capital will
increase, because labor will have (ore capital with which to wor1.
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. 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
10. change in the best technolog) that allows (ore to be produced with a given a(ount of resources
is referred to as%
a. technological gain.
b. technical efficienc) change.
c. technological growth.
d. technological i(prove(ent.
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19. change fro( the use of less than the best to the best technolog) is referred to as%
a. efficienc) progress.
b. efficienc) change.
c. efficienc) i(prove(ent.
d. efficienc) growth.
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'2. point outside the production possibilities curve refers to a co(bination that would be%
a. attainable.
b. efficient.
c. inefficient.
d. unattainable.
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'1. /f the econo() (oves fro( a point inside its production possibilities curve to a point on its
production possibilities curve, there has been%
a. #fficienc) i(prove(ent.
b. &echnological i(prove(ent.
c. #fficienc) growth.
d. &echnological growth.
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''. "hich of the following would result in an outward shift of the production possibilities curve;
a. #fficienc) i(prove(ent.
b. decrease in capital.
c. &echnological i(prove(ent.
d. decrease in land.
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'3. /f societ) wishes to increase living standards while (ini(iBing sacrifices of present consu(ption,
it should encourage%
a. growth in the labor suppl).
b. growth in capital.
c. decreases in capital.
d. technological i(prove(ent.
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',. "hich of the following state(ents about econo(ic growth is +AS#;
a. Greater econo(ic growth (eans sacrificing in the present for the future.
b. Greater econo(ic growth is alwa)s desirable.
c. 5apital accu(ulation can result in econo(ic growth.
d. Aabor force growth can increase GDP, but not usuall) enough to increase living standards.
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&est 4an1 7
'-. Growth in productivit), output per hour, deter(ines how 3uic1l)%
a. technological i(prove(ent can grow.
b. co(pensation per hour can grow.
c. efficienc) i(prove(ent can grow.
d. capital resources can grow.
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'.. "hich of the following could not result in an increase in labor productivit);
a. new econo(ic institution.
b. n increase in the capital stoc1.
c. Growth in the suppl) of labor.
d. "idespread use of a new electronic poc1et secretar) that tells )ou how to arrange )our dail)
activities in the (ost efficient (anner.
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'7. &he increase in the growth rate of capital intensit) in the 1992s was due in large part to%
a. a rapid growth in the labor suppl).
b. a slower growth in the labor suppl).
c. a rapid growth in agricultural technolog) capital.
d. a rapid growth in use of infor(ation technolog) capital.
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'0. #*pert econo(ists believe that the capital intensit) effect on productivit) in the Enew econo()F is
(ainl) tied to the%
a. increases in production of Enew goods.F
b. increases in labor intensit).
c. increases in capital services fro( /& assets.
d. increases in land intensit).
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'9. During 1972s and 1902s, a period of rapid scientific advances%
a. technical change grew at an unprecedented rate in the (anufacturing sector.
b. technical change all but disappeared fro( the U.S. econo().
c. there were positive changes in technical efficienc) in the (anufacturing sector.
d. labor productivit) growth in the (anufacturing sector was greater than it was during the
19.2s.
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32. So(e people feel that continuing low levels of productivit) growth in the U.S. econo() is a result
of%
a. (easure(ent error.
b. increased foreign co(petition.
c. a decrease in prices.
d. an increase in the return that could be earned fro( research and develop(ent.
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0 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
31. "hich of the following are used to e*plain the low levels of productivit) growth that have
persisted in the service sector during the 1902s;
a. (easure(ent error.
b. a lac1 of co(petitive pressures.
c. /t is difficult to (easure output in service industries.
d. ll of above.
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3'. /f the United States wants productivit) to increase it should%
a. increase educational 3ualit).
b. invest less in capital.
c. produce (ore consu(er goods.
d. decrease the rate of growth in the labor suppl).
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33. Studies indicate that%
a. there is no relation between productivit) and the real wage.
b. there is a direct lin1 between the real wage and productivit).
c. there is an inverse relation between the real wage and productivit).
d. changes the real wage lead to changes in productivit).
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3,. ccording to 9addison, the lead econo() operating at the technological frontier is%
a. 8apan.
b. "est Ger(an).
c. the United States.
d. Great 4ritain.
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3-. 8apanese per capita GDP is close to that of the United States: because%
a. hourl) productivit) in 8apan e*ceeds that of the U.S.
b. the average hours wor1ed in the U.S. e*ceed the average hours wor1ed in 8apan.
c. the average hours wor1ed in 8apan e*ceed the average hours wor1ed in the U.S.
d. the 8apanese govern(ent has pursued a polic) of balancing the budget.
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3.. Productivit) growth rates in 8apan and #urope e*ceed those in the United States because%
a. 8apanese and #uropean wor1ers are (ore productive than their (erican counterparts.
b. capital intensit) has increased faster in #urope and 8apan.
c. (anagers of 8apanese and #uropean fir(s are (ore efficient than (anagers of fir(s in the
United States.
d. e(plo)(ent has grown slowl) in the United States.
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37. ccording to 9addison, technical change is occurring (ore rapidl) in 8apan than in the United
States because of%
a. the structural effect.
b. the effect of technological diffusion.
c. the effect of foreign trade.
d. ll of the above.
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&est 4an1 9
30. &he structural effect refers to%
a. changes in productivit) caused b) shifts in econo(ic activit) fro( one part of the econo() to
another.
b. changes in productivit) caused b) the e(plo)(ent of new technolog).
c. changes in productivit) caused b) enacting govern(ent progra(s that increase the 3ualit) of
the labor force.
d. changes in productivit) caused b) i(ple(enting new production techni3ues.
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39 9addison:s technological diffusion effect refers to%
a. shifts in econo(ic activit) fro( one sector to another.
b. transfers in technolog) fro( one countr) to another.
c. increasing the capital>labor ratio in developing countries.
d. increasing the 3ualit) of the labor force in developing countries.
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,2. &he 4os1in 5o((ission clai(s that the 5onsu(er Price /nde* is inaccurate because it fails to
consider 3ualit) i(prove(ents in so(e goods and services. "hich of the following e*a(ples
have probabl) e*perienced (a?or 3ualit) i(prove(ents over the last 12 to 1- )ears;
a. !u(ber ' pencils
b. pples
c. 5ataract re(oval surger)
d. 4aseballs
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Critical Thin!in" MultipleChoice Questions
,1. Sheila currentl) does econo(ic consulting for a fir(. "hen she uses her s1ills to prepare a
consulting report she is acting as%
a. land in the production process.
b. labor in the production process.
c. capital in the production process.
d. hu(an input into the production process.
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,'. <il deposits found on the north slope in las1a would be an e*a(ple of%
a. land.
b. labor.
c. capital.
d. natural resources.
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,3. robot on an asse(bl) line would be an e*a(ple of%
a. land.
b. labor.
c. capital.
d. e3uip(ent.
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12 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
,,. "hich of the following is an e*a(ple of capital;
a. 122 shares of /ntel stoc1.
b. G1,222 govern(ent bond.
c. G122 dollar bill.
d. co(puter used b) a secretar).
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Use the following diagra( to answer 3uestions ,- H ,0.
A
B
C
D
Housing
Cars
0 100 200 300
900
850
775
.
.
.
.
&est 4an1 11
,-. &he best technolog) is being used at%
a. point .
b. point D.
c. an) point be)ond the production possibilities curve.
d. none of the points shown represent use of the best technolog).
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,.. point at which the econo() (ight be technicall) inefficient would be%
a. .
b. 4.
c. 5.
d. D.
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,7. &he sacrifice of (oving fro( point 4 to point is%
a. 0-2 units of housing.
b. 7- units of housing.
c. 122 units of cars.
d. '22 units of cars.
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,0. s we (ove down the production possibilities curve fro( point to point 5, there will be%
a. an increase in both the (arginal cost and (arginal benefit of cars.
b. a decrease in both the (arginal cost and (arginal benefit of cars.
c. a decrease in the (arginal cost of cars and an increase in the (arginal benefit of cars.
d. an increase in the (arginal cost of cars and a decrease in the (arginal benefit of cars.
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,9. Suppose the econo() is producing at a point on its production possibilities curve where the
(arginal benefit of an additional unit of housing is G72,222 while the (arginal cost of an
additional unit of housing is G70,222. /n this instance%
a. the production of housing should decrease.
b. the production of housing should increase.
c. the production of housing should not be changed.
d. the production of housing should be increased onl) if there are ho(eless people.
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-2. Suppose the econo() is producing at a point on its production possibilities curve where the
(arginal benefit of an additional unit of capital is G,-. &he (arginal cost of an additional unit of
capital is G32. /n this instance%
a. the production of capital should decrease.
b. the production of capital should increase.
c. the production of capital should not be changed.
d. the production of capital should be decreased if (an) people in societ) are une(plo)ed.
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1' 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
-1. &he (anage(ent depart(ent:s secretar) has ?ust gotten a new co(puter that allows hi( to do
reports in less ti(e. &his is an e*a(ple of%
a. efficienc) progress.
b. efficienc) change.
c. efficienc) i(prove(ent.
d. efficienc) growth.
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-'. #ngines /ncorporated has ?ust developed a revolutionar) engine that will allow truc1s to haul their
loads across the countr) without stopping for fuel. &his is an e*a(ple of%
a. technological i(prove(ent.
b. technological progress.
c. technical efficienc) change.
d. technological growth.
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&est 4an1 13
Use the following diagra( to answer 3uestions -3 H -,.
A
B
C
D
0
.
.
.
.
Consumption
Capital Goods
Goods
-3. Production at which of the above points would result in the greatest long>ter( growth in GDP;
a. .
b. 4.
c. 5.
d. D.
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1, 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
-,. Suppose the (arginal benefit of (oving fro( point 4 to point 5 is G-22 while the (arginal cost is
G3-2. "e 1now that%
a. the econo() should produce additional capital goods.
b. the econo() should produce additional consu(ption goods.
c. the econo() should sta) at point 4.
d. the econo() should (ove fro( point 4 to point .
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--. s a result of free trade, the power of (onopolies has declined in S(all Aand. &his is an e*a(ple
of%
a. the effect of technological diffusion.
b. the catch>up effect.
c. the structural change effect.
d. the foreign trade effect.
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-.. "hich of the following is an e*a(ple of the technological diffusion effect;
a. &he United States enacts a polic) re3uiring all wor1ers to attend annual training sessions in
order to upgrade their s1ills.
b. 4raBil enacts a wage>price control polic) in atte(pts to decrease the rate of inflation.
c. $ussia i(ports new co(puter technolog) fro( the United States.
d. /n @orea, there is a (a?or shift of resources out of the agricultural sector into the
(anufacturing sector.
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&est 4an1 1-
Use the following diagra( to answer 3uestions -7 H -9.
-7. "hich of the points represents an inefficient production co(bination of piBBa and ovens;
a. .
b. 4.
c. 5.
d. D.
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-0. "hich of the points represents an unattainable production co(bination of piBBa and ovens;
a. .
b. 4.
c. 5.
d. D.
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-9. "hich of the points represent an attainable and efficient production co(bination of piBBa and
ovens;
a. and 4.
b. 4 and 5.
c. 5 and D.
d. D and .
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1. 5hapter 1C#cono(ic Growth% n /ntroduction to Scarcit) and 5hoice
Use the following diagra( to answer 3uestions .2 H .1.
.2. "hich co(bination of piBBa and ovens at present 6p2>p27 would (ore li1el) result in growth
congruent with production possibilities curve 6p1>p17 in the future;
a. .
b. 4.
c. 5.
d. D.
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.1. "hich co(bination of piBBa and ovens at present 6p2>p27 would (ore li1el) result in growth
congruent with production possibilities curve 6p'>p'7 in the future;
a. .
b. 4.
c. 5.
d. D.
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Essay and #iscussion Questions
1. E$aluate the %ollowin" statement& 'Technical pro"ress may (e a less costly means o%
achie$in" lon"term economic "rowth than increasin" capital&'
&his state(ent could be correct. &he student should recogniBe that both technical progress and
increasing the a(ount of capital resources will shift the production possibilities curve outward.
&est 4an1 17
Iowever, in the case of increasing capital resources, there is a sacrifice of current consu(ption.
s(aller or perhaps no sacrifice is li1el) to be associated with technical progress.
'. )hy ha$e some Asian countries e*perienced more rapid "rowth than some +atin American
and A%rican countries,
&he student should discuss the contribution of hu(an capital to rapid growth. 9addison also
points to several other attributes, appropriate incentives for individual decision (a1ers, (ar1ets
that allow prices to fluctuate, and a legal s)ste( that is obe)ed and generates trust has led to the
"est Ger(an success in accu(ulating capital and in generating technical change. +or (an)
)ears, #ast Ger(an) did not have the foundations of a well>functioning (ar1et econo() in place.
&he absence of these foundations does (uch to e*plain the lac1 of econo(ic success in #ast
Ger(an).
3. E*plain what is meant (y the %ollowin" statement& 'The sta"nation o% producti$ity "rowth
in the 1-./s may simply (e a mira"e&'
So(e feel that the stagnation of productivit) growth in the 1902s is si(pl) a result of
(easure(ent error. /n order to (easure productivit), one (ust 1now both price and output. 4oth
of these variables are ver) difficult to (easure accuratel) in the service sector of the econo(). &o
the e*tent that the) are (easured incorrectl), productivit) figures will be inaccurate.
,. 'I% the 0nited States is to remain num(er one in producti$ity1 it must increase the 2uality o%
its la(or %orce&' Is this statement true or %alse, #e%end your answer&
&his state(ent is true. lthough labor 3ualit) had little do with the decrease in productivit)
growth in the 1972s, there is so(e evidence that is a factor in slower productivit) growth in the
1902s. /n toda):s econo(), the (ost i(portant s1ills for the labor force are its literac) and
proble(>solving s1ills. &hese are the s1ills that (an) )oung adults have not ac3uired in school.
s a result, so(e econo(ists argue that if the United States wishes to re(ain a leader in
productivit), it (ust i(prove its labor 3ualit).