Dif 3 ref 25 3 nat analytic loc productivity and

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DIF: 3 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect MSC: Analytical 6. Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from 1960-1991. However, during these same years South Korea had a 6 percent growth rate of average annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different? ANS: The explanation is based on the concept of diminishing returns to capital. A country that has a lot of income, and so a lot of capital, gains less by adding more capital than does a country that currently has little capital. It is easy to envision how a poor country without much capital could increase its output considerably with even a little more capital. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Investment | Catch-up effect | Diminishing returns MSC: Analytical 7. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity? ANS: In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Definitional
Chapter 23 /Measuring a Nation's Income 250 8. Why does a nation’s standard of living depend on property rights? ANS: Property rights are an important prerequisite for the price system to work in a market economy. If an individual or company is not confident that claims over property or over the income from property can be protected, or that contracts can be enforced, there will be little incentive for individuals to save, invest, or start new businesses. Likewise, there will be little incentive for foreigners to invest in the real or financial assets of the country. The distortion of incentives will reduce efficiency in resource allocation and will reduce saving and investment which in turn will reduce the standard of living. DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Property rights MSC: Interpretive 9. How do outward-oriented policies affect a nation's productivity? ANS: Most economists believe that poor nations are better off pursuing outward-oriented policies that promote free trade. Countries that use their comparative advantage in trade are, in effect, helping themselves through the gains from trade in the same way that nations that develop new technology raise their standard of living. Hence, a country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance. Inward-oriented trade policies are akin to a country choosing to restrict the use of superior technologies. DIF: 1 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Economic growth MSC: Interpretive

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