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ECON G200 - CHAPTER 9 Review Questions 1.1 Real GDP per...

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CHAPTER 9 Review Questions 1.1 Real GDP per capita measured in 2000 dollars increased from $4,900 in 1900 to $38,000 in 2006, representing a nearly 8 fold increase. The increase in real GDP per capita is likely to be smaller than the true increase in living standards because many of today’s goods and services, such as antibiotics, air conditioners, and televisions, were not available in 1900. 1.2 The most important factor that explains increases in real GDP per capita in the long run is labor productivity, which is the quantity of goods and services that can be produced by one worker or by one hour of work. 1.3 The two key factors that cause labor productivity to increase over time are the quantity of capital per hour worked and the level of technology. 1.4 Potential real GDP is the level of real GDP attained when all firms are producing at capacity. Historically, potential real GDP has substantially increased over time. Problems and Applications 1.5 There is no one correct answer to this question, but are some relevant considerations: An income of $1,000,000 represents 20 times more basic purchasing power than $50,000 in 2008, so one could have many more goods and services in 1900 than 2008. Even though there were no automatic dishwashers, microwaves, or airplanes in 1900, with $1,000,000 one could afford to have servants wash the dishes, cook, do the laundry, and provide other desired personal services. One could travel in private train cars and in luxurious suites on ocean liners. With an income of $1,000,000 in you could live what in many ways would be a more luxurious life than with an income of $50,000 today. However, you would not have available television, personal computers, the Internet, movies, iPods, DVD players, cell phones or many other goods that today we often think of as necessities. So, a person living with an income of $50,000 in 2008 might in fact enjoy a higher living standard than a person living with an income of $1 million in 1900. 1.6 Increases in real GDP per capita not only increase the amount of goods and services available to a country’s citizens, but also increase life expectancy at birth and allow people to have a higher portion of leisure time over the course of their lives. 1.7 A positive relationship between economic prosperity and life expectancy may be due to increased spending on health care in an economy with a higher income
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level. Therefore, greater economic prosperity would imply a health care sector that is larger relative to the economy. In addition, because the use of the health care system increases with age, as life expectancy increases and the average age of the population increases, we should expect that more people will use the health care system for more years.
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