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1.
The accompanying table shows data from the Penn World Table, Version 6.1, for real GDP per capita in 1996 U.S. dollars for Argentina, Ghana, South Korea, and the United States for 1960, 1970, 1980, 1990, and 2000.
Argentina Ghana

Year

Real GDP Real GDP Percentage of Percentage of per capita 1960 per capita 1960 2000 2000 (1996 real GDP real GDP (1996 real GDP real GDP dollars) per capita per capita dollars) per capita per capita

1960 1970 1980 1990 2000

$7,395 9,227 10,556 7,237 10,995

? ? ? ? ?

? ? ? ? ?

$832 1,275 1,204 1,183 1,349

? ? ? ? ?
United States

? ? ? ? ?

South Korea

Year

Real GDP Real GDP Percentage of Percentage of per capita 1960 per capita 1960 2000 2000 (1996 real GDP real GDP (1996 real GDP real GDP dollars) per capita per capita dollars) per capita per capita

1960 1970 1980 1990 2000

$1,571 2,777 4,830 9,959 15,881

? ? ? ? ?

? ? ? ? ?

$12,414 16,488 21,337 26,470 33,308

? ? ? ? ?

? ? ? ? ?

a. Complete the table by expressing each years real GDP per capita as a percentage of its 1960 and 2000 levels. b. How does the growth in living standards from 1960 to 2000 compare across these four nations? What might account for these differences?

Solution 1.

a. The accompanying table shows each nations real GDP per capita in terms of its 1960 and 2000 levels.
Argentina Ghana

Year

Real GDP Real GDP Percentage of Percentage of per capita 1960 per capita 1960 2000 2000 (1996 real GDP real GDP (1996 real GDP real GDP dollars) per capita per capita dollars) per capita per capita

1960 1970 1980 1990 2000

$7,395 9,227 10,556 7,237 10,995

100% 125 143 98 149

67% 84 96 66 100

$832 1,275 1,204 1,183 1,349

100% 153 145 142 162

62% 95 89 88 100

chapter
8 25

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economics

macroeconomics

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South Korea

United States

Year

Real GDP Real GDP Percentage of Percentage of per capita 1960 per capita 1960 2000 2000 (1996 real GDP real GDP (1996 real GDP real GDP dollars) per capita per capita dollars) per capita per capita

1960 1970 1980 1990 2000

$ 1,571 2,777 4,830 9,959

100% 177 307 634

10% 17 30 63 100

$12,414 16,488 2 1,337 26,470 33,308

100% 133 172 213 268

37% 50 64 79 100

15,881 1,011

b. South Korea experienced the greatest increase in living standards from 1960 to 2000; in 2001 it produced 1,011% ($15,881/$1,571 100) of what it produced in 1960. Argentina and Ghana experienced only a modest growth in living standards over the same period. Argentinas path was less consistent than that of Ghana, where living standards remained low throughout the period. Compared with real GDP per capita in 1960, the United States in 2000 produced 268% ($33,308/$12,414 100) of what it produced in 1960. The growth in living standards in Argentina, Ghana, and South Korea reflects the pattern for their different regions of the world. South Korea, like many other East Asian countries, had high productivity growth because of high savings and investment rates, a good education system, and substantial technological progress. Living standards grew more modestly in Argentina, as in other Latin American countries, because of low savings and investment spending rates, underinvestment in education, political instability, and irresponsible government policies. Although the growth in living standards was similar in Ghana and Argentina, Ghana had started from a much lower level. Real GDP per capita in Ghana was only 11% of that in Argentina in 1960 and 12% in 2000. Living standards in Africa suffered from major political instabilities, poor education and infrastructure, and disease.

2.

The accompanying table shows the average annual growth rate in real GDP per capita for Argentina, Ghana, and South Korea using data from the Penn World Table, Version 6.1, for the past few decades.
Average annual growth rate of real GDP per capita Argentina Ghana South Korea

Years

19601970 19701980 19801990 19902000

2.24% 1.35 3.70 4.27

4.36% 0.57 0.18 1.33

5.86% 5.69 7.51 4.78

a. For each decade and for each country, use the Rule of 70 where possible to calculate how long it would take for that countrys real GDP per capita to double. b. Suppose that the average annual growth rate that each country achieved over the period 19902000 continues indefinitely into the future. Starting from 2000, use the Rule of 70 to calculate, where possible, the year in which a country will have doubled its real GDP per capita.

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Solution 2.

a. The accompanying table shows the number of years it would take for real GDP per capita to double according to the Rule of 70 using the average annual growth rate in real GDP per capita per decade in each country. Values corresponding to years with negative growth rates are left uncalculated because we cannot apply the Rule of 70 to a negative growth rate.
Years for real GDP per capita to double according to the Rule of 70 Years Argentina Ghana South Korea

19601970 19701980 19801990 19902000

31.3 51.9 16.4

16.1 52.6

11.9 12.3 9.3 14.7

b. If each nation continues to grow as it did from 1990 to 2000, real GDP per capita will have doubled in Argentina by 2016, in Ghana by 2052, and in South Korea by 2014.

3.

You are hired as an economic consultant to the countries of Albernia and Brittania. Each countrys current relationship between physical capital per worker (K/L) and output per worker (Y/L) is given by the curve labeled Productivity1 in the accompanying diagram. Albernia is at point A and Brittania is at point B.
Real GDP per worker (Y/L)B

Productivity1

(Y/L)A

(K/L)A

(K/L)B

Physical capital per worker

a. In the relationship depicted by the curve Productivity1, what factors are held fixed? Do these countries experience diminishing returns to physical capital per worker? b. Assuming that the amount of human capital per worker and the technology are held fixed in each country, can you recommend a policy to generate a doubling of real GDP per capita in each country? c. How would your policy recommendation change if the amount of human capital per worker and the technology were not fixed? Draw a curve on the diagram that represents this policy for Albernia.

Solution 3.

a. The curve reflecting the relationship between physical capital per worker (K/L) and output per worker (Y/L) is drawn holding human capital per worker and technology fixed. Both Albernia and Brittania experience diminishing returns to physical capital since in both countries equal successive increases in physical capital per workerholding human capital per worker and technology constantwill result in smaller and smaller increases in real GDP per worker.

b. Albernia should increase its physical capital per worker to (K/L)B. Brittania will have to add a huge amount of physical capital per worker.

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c. If it were possible to increase the amount of human capital per worker or improve the technology, or both, then Productivity1 could shift to Productivity2 and Albernia could double real GDP per worker without a change in the physical capital per worker. On the accompanying diagram, Albernia would move from point A to point C.
Real GDP per worker Productivity2

Productivity1 (Y/L)B

(Y/L)A

(K/L)A

(K/L)B

Physical capital per worker

4.

Why would you expect real GDP per capita in California and Pennsylvania to exhibit convergence but not in California and Baja California, a state of Mexico that borders the United States? What changes would allow California and Baja California to converge?

4. Solution

According to the conditional convergence hypothesis, other things equal, countries with relatively low real GDP per capita tend to have higher rates of growth than countries with relatively high real GDP per capita. We can apply this hypothesis to regions as well. It is more likely that the factors that affect growth will be equal in California and Pennsylvania: both states have similar educational systems, infrastructure, rule of law, and so on. But that is not true of California and Baja California: in comparing them, the factors that affect growth are not likely to be equal. California and Baja California have very different educational systems, different infrastructures, and there are differences in how the rule of law is applied. So it is less likely that they will converge. For California and Baja California to converge in real GDP per capita, they would have to become more similar in the factors that affect growth. The economy of Profunctia has estimated its aggregate production function, when holding human capital per worker and technology constant, as
Y = 100 L K L

5.

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Y is real GDP, L is the number of workers, and K is the quantity of physical capital. Given that Profunctia has 1,000 workers, calculate real GDP per worker and the quantity of physical capital per worker for the differing amounts of physical capital shown in the accompanying table.
K L K/L Y/L

$0 10 20 30 40 50 60 70 80 90 100

1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

? ? ? ? ? ? ? ? ? ? ?

? ? ? ? ? ? ? ? ? ? ?

a. Plot the aggregate production function for Profunctia. b. Does the aggregate production function exhibit diminishing returns to physical capital? Explain your answer.

Solution 5.
K

a. The accompanying table and diagram show the aggregate production function for Profunctia.
L K/L Y/L

$0 10 20 30 40 50 60 70 80 90 100
Real GDP per worker, Y/L $30

1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

$0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10

$0.00 10.00 14.14 17.32 20.00 22.36 24.49 26.46 28.28 30.00 31.62

20

10

$0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 Physical capital per worker, K/L

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b. The aggregate production function does exhibit diminishing returns to physical capital. For example, the table shows that as K increases from $30 to $40, Y/L increases by $2.68, but as K increases from $70 to $80, Y/L increases only by $1.82.

6.

The Bureau of Labor Statistics regularly releases the Productivity and Costs report for the previous month. Go to www.bls.gov and find the latest report. (On the Bureau of Labor Statistics home page, click on Productivity under Latest Numbers and then choose the latest Productivity and Costs report.) What were the percent changes in business and nonfarm business productivity for the previous quarter? How does the percent change in that quarters productivity compare to previous data?

Solution 6.
7.

Answers will vary with the latest data. For the third quarter of 2005, business and nonfarm business productivity grew by 4.8% and 4.1%, respectively. These were higher than the productivity growth figures for the second quarter of 2005, which were 0.81% and 2.1%, respectively. What roles do physical capital, human capital, technology, and natural resources play in influencing long-run economic growth of aggregate output per capita?

Solution 7.

Physical capital, human capital, technology, and natural resources play important roles in influencing long-run growth in real GDP per capita. Increases in both physical capital and human capital help a given labor force to produce more over time. Although economic studies have suggested that increases in human capital may explain increases in productivity better than increases in physical capital per worker, technological progress is probably the most important driver of productivity growth. While natural resources played a prominent role historically in determining productivity, they play a less important role in increasing productivity than do increases in human or physical capital in most countries today. Through its policies and institutions, how has the United States influenced U.S. longrun economic growth? Why might persistently large borrowing by the U.S. government ultimately limit long-run economic growth in the future?

8.

Solution 8.

Institutions and policies in the United States have greatly aided U.S. economic growth. The country has been politically stable, and its laws and institutions protect private property. The economy has attracted significant savings, both domestic and foreign, that have allowed investment spending to spur the growth of the capital stock and fund research and development. The government has directly supported economic growth through its support of public education as well as research and development. However, the governments persistently large borrowing may reduce private investment spending (a phenomenon known as crowding out), consequently slowing economic growth.

9.

Over the next 100 years, real GDP per capita in Groland is expected to grow at an average annual rate of 2.0%. In Sloland, however, growth is expected to be somewhat slower, at an average annual growth rate of 1.5%. If both countries have a real GDP per capita today of $20,000, how will their real GDP per capita differ in 100 years? (Hint: A country that has a real GDP today of $x and grows at y% per year will achieve a real GDP of $x (1 + 0.0y)z in z years.)

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Solution 9.

If real GDP per capita in Groland grows at an average annual rate of 2.0%, real GDP per capita in 100 years will be $144,893 [$20,000 (1 0.02)100]. At an average annual rate of growth of 1.5%, real GDP per capita in Sloland in 100 years will be $88,641 [$20,000 (1 0.015)100]. Although both nations start with the same real GDP per capita today, the differential growth rates will result in living standards in Sloland that are 61.2% ($88,641/$144,893 100) of those in Groland. The accompanying table shows data from the Penn World Table, Version 6.1, for real GDP per capita (1996 U.S. dollars) in France, Japan, the United Kingdom, and the United States in 1950 and 2000. Complete the table. Have these countries converged economically?
1950 Real GDP Percentage per capita of U.S. (1996 real GDP dollars) per capita Real GDP per capita (1996 dollars) 2000 Percentage of U.S. real GDP per capita

10.

France Japan United Kingdom United States

$5,561 2,445 7,498 10,601

? ? ? ?

$22,254 24,495 22,849 33,308

? ? ? ?

Solution 10.

The accompanying table shows real GDP per capita (1996 U.S. dollars) in France, Japan, and the United Kingdom as a percentage of real GDP per capita in the United States.
1950 Real GDP per capita (1996 dollars) Percentage of U.S. real GDP per capita Real GDP per capita (1996 dollars) 2000 Percentage of U.S. real GDP per capita

France Japan United Kingdom United States

$5,561 2,445 7,498 10,601

52.5% 23.1 70.7 100.0

$22,254 24,495 22,849 33,308

66.8% 73.5 68.6 100.0

Real GDP per capita in France and Japan, the two nations with the lowest real GDP per capita in 1950, closed some of the gap in living standards with the United States. Japans real GDP per capita grew from only 23.1% of that in the United States to 73.5%, and Frances rose from 52.5% to 66.8%. But living standards in the United Kingdom relative to those in the United States actually declined; real GDP per capita fell from 70.7% of that in the United States to 68.6%. France and Japan have converged, but the United Kingdom has not.

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11.

The accompanying table shows data from the Penn World Table, Version 6.1, for real GDP per capita (1996 U.S. dollars) for Argentina, Ghana, South Korea, and the United States in 1960 and 2000. Complete the table. Have these countries converged economically?
1960 Real GDP Percentage per capita of U.S. (1996 real GDP dollars) per capita Real GDP per capita (1996 dollars) 2000 Percentage of U.S. real GDP per capita

Argentina Ghana South Korea United States

$7,395 832 1,571 12,414

? ? ? ?

$10,995 1,349 15,881 33,308

? ? ? ?

Solution 11.

The accompanying table shows real GDP per capita (1996 U.S. dollars) in Argentina, Ghana, and South Korea as a percentage of real GDP per capita in the United States.
1960 Real GDP per capita (1996 dollars) Percentage of U.S. real GDP per capita Real GDP per capita (1996 dollars) 2000 Percentage of U.S. real GDP per capita

Argentina Ghana South Korea United States

$7,395 832 1,571 12,414

59.6% 6.7 12.7 100.0

$10,995 1,349 15,881 33,308

33.0% 4.0 47.7 100.0

There is little evidence of convergence for either Argentina or Ghana. Living standards in both nations declined relative to those in the United States. In Argentina real GDP per capita fell from 59.6% of that of the United States to 33.0%; Ghanas fell from 6.7% to 4.0%. But South Koreas real GDP per capita showed signs of convergence with those in the United States; real GDP per capita rose from 12.7% of that in the United States to 47.7%.