13.8: Exercises for Chapter 13

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EXERCISE 13.1

What is the distinction between growth in potential GDP and growth in per capita real GDP?
Why is this distinction important to an evaluation of the relationship between economic growth and growth in standards of living?
Which grows more rapidly, potential GDP or per capita real GDP?

EXERCISE 13.2

Consider two countries with the same level of potential GDP, say $100 billion, today. Suppose potential GDP grows at an annual rate of 3.5 percent (0.035) in one country and 3.25 percent (0.0325) in the second country. Based on this information:

What do you predict for the percentage difference in potential GDP between the two countries 10 years in the future?
20 years in the future? [Note that the growth rates will compound to determine real GDP according to the following formula: .]

EXERCISE 13.3

Suppose you have the following information about an economy:

Average annual rates of growth from 1998 to 2008:

Potential GDP	3.5%
Labour force	2.1%
Capital stock	3.0%

Share of labour income in national income: 2/3. Using growth accounting, find the contribution to the annual growth in potential GDP that came from:

Growth in labour force
Growth in capital stock
Improved productivity as measured by the Solow residual.

EXERCISE 13.4

If technology were constant while labour force grew at a rate of 2.5% a year, capital stock grew at 1.5% per year and the share of labour income in national income was 70%, how fast would potential GDP grow?

EXERCISE 13.5

Suppose you have the following information for two economies:

		Country A	Country B
Average annual	i. Labour force	2.5%	4.0%
growth rates:	ii. Capital stock	3.5%	3.5%
Labour income/national income:		2/3	2/3

Assuming a constant state of technology, which of these two countries will have the faster rate of growth in total real GDP?
Which of the two countries will have the faster rate of growth in per capita real GDP?
What differences, if any, do you see in the growth rates of the capital to labour ratios in the two countries?
Explain the reasons for the differences in growth rates you have found.

EXERCISE 13.6

In Wonderland, labour force and capital stock both grow at the rate of 2.5% a year but technology is constant. At what rate will potential GDP grow? At what rate will per capita GDP grow? If improvements in technology increased total factor productivity by 1.5% year, how fast would per capita real GDP grow?

EXERCISE 13.7

Why do economists emphasize that improvements in technology are the key to improvements in standards of living?
Using a diagram that shows the relationship between capital per worker and output per worker, illustrate and explain why growth in capital per worker cannot provide sustained growth in output per worker and standards of living.
In the diagram in part (b), show how an improvement in productivity coming from improved technology could provide sustained increases in standards of living.