Chapter 26 - Economic Growth

McConnell, Brue, and Flynn 20e

DISCUSSION QUESTIONS
3. Why are some countries today much poorer than other countries? Are todays poor countries destined to
always be poorer than todays rich countries? If so, explain why. If not, explain how todays poor
countries can catch or even pass todays rich countries. 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 from 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).
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
can take advantage of the pre-existing technologies and catch-up with the wealthier
countries of the world. An example of this is South Korea.
4. What are the four supply factors of economic growth? What is the demand factor? What is the
efficiency factor? Illustrate these factors in terms of the production possibilities curve. LO3

Answer: The four supply factors are the quantity and quality of natural resources; the
quantity and quality of human resources; the stock of capital goods; and the level of
technology. The demand factor is the level of purchases needed to maintain full
employment. The efficiency factor refers to both productive and allocative efficiency.
Figure 26.2 illustrates these growth factors by showing movement from curve AB to
curve CD.
PROBLEMS
1. Suppose an economys real GDP is $30,000 in year 1 and $31,200 in year 2. What is the growth rate of
its real GDP? Assume that population is 100 in year 1 and 102 in year 2. What is the growth rate of real
GDP per capita? LO1
Answer: 4%; 1.96%
Feedback:
The growth rate of the economy's real GDP equals 4% (=( ($31,200 - $30,000)/$30,000) x 100).
To determine the growth rate of real GDP per capita we first need to find real GDP per capita for
each (= real GDP/population).
real GDP per capita year 1 = $30,000/100 = $300
real GDP per capita year 2 = $31,200/102 = $305.88
Thus, the growth rate of the economy's real GDP per capita equals 1.96% (=( ($305.88 - $300)/
$300) x 100).

4. Refer to Figure 26.2 and assume that the values for points a, b, and c are $10 billion, $20 billion, and
$18 billion respectively. If the economy moves from point a to point b over a 10-year period, what must
have been its annual rate of economic growth? If, instead, the economy was at point c at the end of the 10year period, by what percentage did it fall short of its production capacity? LO3
Answers: 7 percent; 10 percent.
Feedback:
The Rule of 70, which is to divide 70 by the rate of growth, gives us the time it takes for a
country to double its output.
Years to double = (70 / Rate of Growth)
Rearranging this equation
Rate of Growth = (70 / Years to double)
Since the economy doubles its output in 10 years the rate of growth over this period was 7% (=
70/10).
If actual production is at point c, $18 billion, inside the production possibilities curve output is
falling short of production capacity by 10% (= $2 billion (amount short) / $20 billion).