CHAPTER 7

CHAPTER 24  

ECONOMIC GROWTH: THEORY AND POLICY

 

TEST YOURSELF

 

2. Yes this would fit the pattern of U.S. productivity growth since the mid-1970s.  Development of new technology may not have an immediate payoff since it may be costly to adopt and adapt to the new technology. However as the technology becomes distributed throughout the economy and businesses figure out how to best use the technology productivity begins to grow. Also there is often a compounding effect as new technology begets new technology and thus

productivity growth escalates.

 

4. Investia will enjoy a higher PPF in the following year because it devoted more of its resources toward capital goods. That is, it sacrificed consumer goods today to increase its potential for consumer goods the following year.

 

DISCUSSION QUESTIONS

 

1. Long-run growth policies encourage capital formation, education and training, and the development of new technology. The objective of growth policies is to shift the production function upward and ensure that the economy sustains a high long-run growth rate. The objective of (short-run) stabilization policy is to maintain the actual GDP close to potential GDP in the short run, so that neither high unemployment nor high inflation is a problem.

 

2.   A stable political system and well-established property rights provide the foundation for firms to make long-term capital investments. Firms will not make long-term investments such as factories, if there is a risk that the government will collapse or decide to nationalize the industry and confiscate the factory.

3.   A country that wanted to slow business investment could increase real interest rates. The government could also change provision in their tax code to make investment more expensive. The government could also take steps to slow the growth of aggregate demand. Each of these steps may cause the economy to stagnate; a fate that many economists would say is far worse than “investing too much”.

4.   (a.)   Mozambique is a very poor country that could benefit from education in the basic skills of reading, writing, and arithmetic as well as skills such as sustainable farming and nutrition.

       (b.)   Brazil is a country with a rapidly growing labor force, a country making the transition from a developing to an industrial country. Education policy here should focus on expanding basic K-12 education to the poor and illiterate. Another goal of education policy should be to expand their universities, providing basic research and development to enhance the development of industrial technology.

       (c.)   France is a highly educated industrial country. Education policy here should focus on development of new technology.

5.   Increases in the volume of investment spending were an important factor in explaining the productivity speed-up in 1995. However, business investment spending as a share of GDP did not decline during the early 1970s and therefore is not a contributing factor productivity slowdown of 1973.