Which of the following best describes the accuracy of these statements?

A)                                       Correct                                      Incorrect          Incorrect

B)                                       Correct                                        Correct           Correct

C)                                       Correct                                          Correct                   Incorrect

Q2. Brent Bates, CFA, is a portfolio manager for a large money management firm located in New York. Analysts at the firm, led by Bates, have been following the development of the economic situation in Mexico after the signing of NAFTA in 1994, which lifted certain restrictions on investment in Mexico commerce by foreign firms. After a period of adjustment, the firm believed the Mexican market presented opportunity for attractive investment returns. The firm has recently purchased a controlling interest in a commercial bank based in Mexico City. One of the first measures to be taken by the firm is to diversify the bank’s portfolio through investments in Central and South America. The firm believes that Bates’ expertise in the analysis of the Mexican economy will be beneficial is pursuing other Latin American investment opportunities.

Bates has identified two potential investments, both of which he believes will be in alignment with his firm’s investment criteria, and is ready to present his recommendations to the firm’s managing directors. One of Bates’ recommended investment opportunities is a company located in Country A, the largest country in South America, while the other is headquartered in Country B, a smaller Central American nation. Knowing that the firm’s partners have limited knowledge of the nuances of the Latin American economies, Bates decides to take a “macro” approach to his presentation by providing broad economic information about the current situations in the two countries.

Bates begins with the company located in Country A, which is one of the largest manufacturers of women’s shoes in South America. The country’s economy has battled extremely high rates of inflation in the past. Over the past decade, tough policies enacted by its government appear to have controlled inflation while at the same time allowed measurable growth in real GDP. In the past ten years, Country A’s real GDP per labor hour has increased from $8.00 per labor hour to $8.64 in this time period. Over the same time period, investment in new capital increased from $18.00 per labor hour to $18.90 per labor hour.

The company located in Country B has been operating in a much different economic climate than the first company. After a history of low productivity and a predominantly rural-based economy, the government of Country B has attempted to stimulate national productivity through a series of policies designed to promote more industrial commerce. Country B has established a multi-part system of incentives to encourage economic growth. Formerly state-run enterprises are increasingly being transferred into private ownership. The government of Country B has encouraged more foreign investment through less restrictive investment regulations. Also, interest rates are being carefully managed through accommodating fiscal and monetary policies to encourage growth.

According to the classical growth theory, Country A’s recent growth in real GDP:

A)   is a result of the recent decrease in interest rates, which intensified incentives to discover new production methods that increase profitability.

B)   is directly attributable to a decreased opportunity cost for women to enter the workplace.

C)   will lead to an explosion in population growth that will eventually erase any gains in GDP per labor hour.

Q3. In general, which of the following factors is credited with being the largest contributor to a country’s sustained economic growth?

A)   Investment in new capital.

B)   Investment in human capital.

C)   Discovery of new technologies.

Q4. The amount of Country A’s increase in GDP per labor hour that can be attributed to the change in capital per labor hour is closest to:

A)   3.33%.

B)   2.50%.

C)   1.67%.

Statement 3 is incorrect. It is the neoclassical theory of economic growth (not the classical theory) that contends that population growth is a direct function of the opportunity cost for women entering the workplace.

Q2. Correct answer is C)

A key component of the classical growth theory is that growth in GDP is always temporary. When real GDP per capita rises above a subsistence level, the population will grow, driving GDP per capita back down to its original level.

Q3. Correct answer is C)

The discovery of new technologies has contributed more to sustained economic growth than investment in new capital or increased investment in human capital.

Q4.Correct answer is C)

According to the “one-third” rule, at a given level of technology, a one percent increase in capital per labor hour results in a 1/3 of 1% increase in real GDP per labor hour. If capital labor per hour grew by 5%, then the capital growth contribution to the increase in GDP is 1.67% (= 1/3 × 5%).