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Chap025-Solutions - Chapter 25 Economic Growth Chapter 25...

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Chapter 25 - Economic Growth 25-1 Chapter 25 Economic Growth QUESTIONS 1. How is economic growth measured? Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades? LO1 Answer: Economists define and measure economic growth as either: An increase in real GDP occurring over some time period, or an increase in real GDP per capita occurring over some time period. With either definition, economic growth is calculated as a percentage rate of growth per quarter (3-month period) or per year. Economic growth means a higher standard of living, provided population does not grow even faster. And if it does, then economic growth is even more important to maintain the current standard of living. Economic growth allows the lessening of poverty even without an outright redistribution of wealth. If population is growing at 2.5 percent a year and it is in some of the poorest nations then a 2.5 percent growth rate of real GDP means no change in living standards. A 3.0 percent growth rate means a gradual rise in living standards. For a wealthy nation, such as the United States, with a GDP in the neighborhood of $10 trillion, the 0.5 percentage point difference between 2.5 and 3.0 percent amounts to $50 billion a year, or more than $150 per person per year. Using the “Rule of 70,” it would take 28 years for output to double with a 2.5 percent growth rate, and just over 23 years with 3.0 percent growth. 2. When and where did modern economic growth first happen? What are the major institutional factors that form the foundation for modern economic growth? What do they have in common? LO2 Answer: Economic historians informally date the start of the Industrial Revolution to the year 1776, when Scottish inventor James Watt perfected a powerful and efficient steam engine. The institutions are: Strong property rights, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, and a competitive market system. 3. Why are some countries today much poorer than other countries? Are today’s poor countries destined to always be poorer than today’s rich countries? If so, explain why. If not, explain how today’s poor countries can catch or even pass today’s rich coun tries. LO2 Answer: The reason we see such stark differences in income per capita is because of modern economic growth. The countries that began the modern economic growth process sooner, the ‘leader’ countries, have moved away fro m the countries that started the process later (or still have not started the process). The reason why some countries started the growth process sooner is still debated, but some common institutions tend to be the primary catalyst (property rights, education, efficient financial institutions, and free trade).
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Chapter 25 - Economic Growth 25-2 The poorer countries are not destined to always be poor. It is thought that if these countries can develop the appropriate institutions, which may be country specific, they
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