34 Explain why a centrally planned economy might not grow as rapidly as a

34 explain why a centrally planned economy might not

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34) Explain why a centrally-planned economy might not grow as rapidly as a marketeconomy.34)Answer: Technological change is very important for growth. Simply accumulating inputswill not ensure growth unless technological change occurs. This is essentially whathappened in the Soviet Union. The Soviet Union failed to enhance growth when itsimply increased its capital to labor ratio because it did not foster technologicalchange at the same time. In a market economy, entrepreneurs make decisionsabout employing technology and seeking innovations. If the entrepreneur makes acorrect decision, then he or she stands to make a large profit. In a centrally plannedeconomy, these decisions are made by managers employed by the government. Ifthe innovation works out, the manager may not reap any sort of benefit from it.Likewise, if the innovation fails, the managerʹs financial position is unaffected.Because of this, managers employed by the central government may be slower toadopt new technologies as compared to entrepreneurs in a market economy. Theprofit incentive spurs entrepreneurs in market economies to move more quickly.Diff: 2Page Ref: 682-683/308-309Topic: Determinants of Economic GrowthLearning Outcome: Macro 1: Define macroeconomics and identify its basic concernsAACSB: Reflective Thinking35) Use the rule of 70 to illustrate how small differences in growth rates can have a largeimpact on how rapidly the standard of living in a country increases.35)Answer: The rule of 70 refers to a calculation that determines, for a given growth rate, thenumber of years it will take for real GDP to double in an economy. The formula isas follows:Number of years to double=70growth rate.If the growth rate is 1%, it will take 70 years for GDP to double. If the growth rate is2%, GDP will double in 70/2 years=35 years. A small increase in the growth rate(from 1% to 2%) cuts the years it takes for the economy to double in half. If thegrowth rate is 5%, GDP will double in 14 years. So when the rate of growth jumps 3more percentage points, GDP doubles in less than half the time as when growthwas 2%Diff: 1Page Ref: 682/308Topic: The Rule of 70Learning Outcome: Macro 1: Define macroeconomics and identify its basic concernsAACSB: Reflective Thinking8

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