Economic Growth worksheet

Economic Growth: answer key

1. 1. (B) Economic growth is a sustained rise in real GDP per capita. Nominal GDP can rise simply because of inflation, which is why Option A misses the mark. Per capita matters because a country whose population grows as fast as its output isn't getting richer on an individual basis. Lower unemployment and higher government spending might affect short-term output levels, but they don't define long-run economic growth.

2. 2. (C) Doubling time = 70 / growth rate = 70 / 3.5 = 20 years. The Rule of 70 comes from the mathematics of compound interest and gives a good approximation for growth rates under 10%. Small differences in sustained growth rates compound into massive differences over decades: a country growing at 2% doubles every 35 years, while one growing at 7% doubles every 10 years.

3. 3. (B) Human capital means the skills, education, and training embedded in workers. Public education spending builds those capabilities directly. Options A, C, and D are physical capital: factories, equipment, and infrastructure. The distinction matters because the two types of capital combine in production; workers with better training extract more from the same physical tools, which is part of why developing economies that invest heavily in education see faster growth.

4. 4. (B) TFP captures efficiency gains not traceable to more workers or more capital. It reflects technology, management practices, institutions, and knowledge diffusion. Robert Solow introduced this residual in his 1956 model and won the Nobel Prize for it in 1987. If an economy produces 2% more without adding workers or capital, that 2% comes from TFP growth, which means doing things smarter rather than just doing more.

5. 5. (B) Property rights and contract enforcement let people and firms invest with confidence. If the government could expropriate factories or courts can't enforce deals, nobody builds anything for the long term. Acemoglu's 2024 Nobel Prize research pointed to institutions as the primary explanation for why some countries got rich while others didn't. The other options work against growth: subsidies misallocate resources toward weak industries, high inflation creates uncertainty, and trade restrictions block both export markets and technology transfer.

6. 6. (B) Diminishing returns to capital is a key reason growth slows in rich countries. The first factory on a farm transforms productivity. The tenth factory adds much less. Output rises when capital doubles, but at a decreasing rate. This explains why countries with low starting capital (China in the 1980s, Japan in the 1950s) grew fast as they caught up, while mature economies like the US and Western Europe grew more slowly. Sustained long-run growth therefore requires technological progress, because capital accumulation alone eventually hits diminishing returns.

7. 7. (B) Technological progress means innovations that let the same inputs produce more output. Better seeds are a classic example, and Norman Borlaug's Green Revolution of the 1960s transformed agricultural productivity across Asia and Latin America. Option A accumulates more capital. Option C builds human capital. Option D replicates existing capacity. All three increase output, but they're not technological progress. Technology is specifically about new knowledge and new methods, and it's what drives sustained growth once diminishing returns limit the gains from simple capital accumulation.

8. 8. (B) Savings fund investment. Through the loanable funds market, household savings become financing for businesses to build factories, buy equipment, and expand operations. More capital per worker raises labor productivity, which is the core channel of growth theory. China's extraordinary growth from 1978 onward came partly from its roughly 45% savings rate channeled into massive infrastructure and industrial investment. Option A misses the point, because savings and consumption are substitutes in the short run. Option C reverses the basic relationship.

9. 9. (C) Use the Rule of 70. Country A doubles every 70/4 ≈ 17.5 years, so 35 years gives two doublings, meaning 4x the starting GDP. Country B doubles every 70/2 = 35 years, so one doubling over the same period. If both started at $10,000 per capita, Country A would reach $40,000 while Country B would only reach $20,000. That gap illustrates why economists care about small growth rate differences: the Asian Tigers' 6-8% growth compounded into a generational transformation that 2-3% growth could never produce.

10. 10. (B) Growth theory points to a combination of factors rather than any single lever. Physical capital (factories, equipment) raises worker productivity, but only up to a point because of diminishing returns. Human capital (education, training) lets workers use that capital more effectively. Technological progress shifts the entire production function upward, escaping the diminishing returns trap. Strong institutions (property rights, contract enforcement, rule of law) make all of these investments worthwhile by protecting the returns. Remove any one and growth suffers. Countries that succeed in the long run (the US, Japan, South Korea, Singapore) invested in all of these areas together.

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