Question 2 - 8408

Jonathan Williams works for the Federal Reserve Bank in Atlanta as an economist. He is also serving as an adjunct professor of economics at a local community college. At the night class he teaches, he has covered the core concepts of growth accounting and growth theory. His class has learned about such basic topics as the production function, factor shares of income, and the growth accounting equation. They have spent a significant amount of time reviewing the fundamentals of neoclassical growth theory, and how it makes several predictions concerning trends in economic growth.

Williams believes that his students have a solid understanding of each of the individual concepts, but would like to take things a step further. He feels that the students need a better understanding of how the various concepts interrelate with one another. Williams would like his students to take what they have learned so far this semester about growth accounting and growth theory, and apply it to a 途eal world・example. They should be able to manipulate the total output growth and output per capita growth equations to analyze growth factors for different countries. The students should also be able to apply neoclassical growth theory to explain trends in the economic growth of a country. They should know what the effects of increases in savings rates, population growth, and technology will have upon a country痴 economy. He has asked his class to prepare a report on the U.S. economy, and he has outlined for his students which topics he expects them to cover.

Part 1)
For the U.S., a good approximation of the fraction of total output (GDP) that goes to compensate capital is:

Part 2)
Which term is known as the growth of total factor productivity?

Part 3)
Which of the following statements regarding economic growth is FALSE?

Part 4)
Which of the following statements regarding neoclassical economic theory is FALSE?

Part 5)
Which of the following equations is the growth accounting equation?

Part 6)
In the growth accounting framework, increases in output come from growth in all of the following EXCEPT:

Question

Part 1)
Your answer: B was incorrect. The correct answer was C) 25%.

The remaining 75% represents the total output (GNP) that goes to compensate labor.

Part 2)
Your answer: B was correct!

This term measures technological progress. It is the amount by which output would increase because of improvements in production methods if capital and labor growth were zero.

Part 3)
Your answer: B was incorrect. The correct answer was D) Physical capital, human capital, and labor explain about 60% of the difference in output growth between countries.

The percentage explained by physical capital, human capital, and labor is closer to 80 percent, not 60 percent. The other answers are true. Note that natural resources can explain a significant part of the growth in output in some situations as exemplified by the strong growth in Norway due to the discovery and development of oil reserves between 1970 and 1990.

Part 4)
Your answer: B was incorrect. The correct answer was C) Increases in savings rates will increase long-run economic growth rates.

Increases in savings rates will not increase long-term growth rates. If savings rates change, the growth rate in output will adjust so that it will be at the level it was at before the change in savings rates. The other answer choices are true. Increases in savings rates increase the steady-state level of income by increasing the capital-output ratio. Standard of living improvements do come from technological progress, not population growth.

Part 5)
Your answer: B was correct!

Output growth = (labor share x labor growth) + (capital share x capital growth) + technological progress.

Part 6)
Your answer: B was incorrect. The correct answer was D) savings.

Output = Level of Technology x Some production function of capital and labor.