In which country did the Industrial Revolution begin before spreading to other nations?
Great Britain
✓
France
Germany
The United States
Correct Answer
Great Britain
The Industrial Revolution, the spread of power-driven machinery such as the steam engine and power loom, began in Great Britain. France was not where it started. Germany industrialized later as the new methods spread across Europe. The United States also adopted the new machinery after Britain.
Category: Modern Economic Growth
Question 2
Which measure do economists commonly use to gauge how productive a nation's workers are?
Total output of the economy
Output per hour worked
✓
Number of people employed
Total wages paid in a year
Correct Answer
Output per hour worked
Labor productivity is usually measured as the value of output produced per hour of work, which shows how efficiently labor is used. Total output of the economy also depends on how many people work and how long, so it is not a per-worker measure. Number of people employed counts workers but says nothing about what each produces. Total wages paid in a year measures labor income, not output per unit of labor.
Category: Labor Productivity
Question 3
An economy in which the amount of equipment and skills per worker keeps rising is experiencing what?
Diminishing returns
Economies of scale
Capital deepening
✓
Economic convergence
Correct Answer
Capital deepening
Capital deepening is an increase in the amount of capital per person, and it applies to both physical capital and human capital. Diminishing returns describes the shrinking extra output from each added unit of an input. Economies of scale are cost advantages that come from producing at a larger size. Economic convergence is the narrowing of income gaps between poorer and richer countries.
Category: Components of Growth
Question 4
An economy's real GDP is 100 and grows at 3 percent per year. Using compound growth, what is real GDP after 2 years? Round to two decimal places.
106.00
103.00
109.27
106.09
✓
Correct Answer
106.09
Compound growth gives 100 x (1.03)^2 = 100 x 1.0609 = 106.09, because the second year's growth applies to a base that already includes the first year's growth. The value 106.00 adds 3 twice and ignores compounding. The value 103.00 is the result after only 1 year. The value 109.27 is the result after 3 years.
Category: Compound Growth
Question 5
What are studies called that estimate how much of an economy's growth comes from machines, worker skills and technology?
Growth accounting
✓
National income accounting
Cost-benefit analysis
Capital budgeting
Correct Answer
Growth accounting
Growth accounting uses an aggregate production function to divide observed growth among physical capital, human capital and technology. National income accounting measures GDP and its components, not the sources of growth. Cost-benefit analysis compares the gains and costs of a single project or policy. Capital budgeting is how a firm decides which investment projects to fund.
Category: Growth Accounting
Question 6
A surgeon operates and later uses the courts to collect payment from a patient who refuses to pay. Which legal protection makes this possible?
Patent rights
Contractual rights
✓
Voting rights
Free speech rights
Correct Answer
Contractual rights
Contractual rights let people make binding agreements about their property and services and seek legal recourse when the other party does not comply. Patent rights protect an inventor's ability to profit from an invention, not the collection of a fee. Voting rights concern participation in elections. Free speech rights protect expression, not the enforcement of agreements.
Category: Rule of Law
Question 7
Which feature of a legal system does the rule of law require?
Laws can be kept secret from the public
Laws change at the ruler's discretion
Laws apply equally to everyone, including officials
✓
Laws exempt the largest firms from contracts
Correct Answer
Laws apply equally to everyone, including officials
The rule of law requires laws that are clear, public, fair, enforced and applied equally to all, including those who govern. Laws that can be kept secret from the public violate the requirement that laws be public. Laws that change at the ruler's discretion are not predictable rules. Laws that exempt the largest firms from contracts are not applied equally.
Category: Rule of Law
Question 8
Alexander Gerschenkron argued that low-income countries can grow quickly by adopting technologies already developed in richer countries. What is this idea called?
Capital deepening
Economies of scale
Growth accounting
Advantages of backwardness
✓
Correct Answer
Advantages of backwardness
The advantages of backwardness is the idea that a country behind the technology frontier can copy existing, well-understood methods instead of inventing new ones, which gives it extra room to catch up. Capital deepening is a rise in capital per person. Economies of scale are cost savings from larger size. Growth accounting measures how much growth comes from each input.
Category: Convergence
Question 9
Why does diminishing marginal returns to capital suggest that poorer countries can grow faster than richer ones?
An added unit of capital raises output more where capital is scarce
✓
Poorer countries already use more advanced technology
Richer countries are unable to invest in physical capital
Faster population growth raises output per person
Correct Answer
An added unit of capital raises output more where capital is scarce
With diminishing marginal returns, each extra unit of capital adds less output than the one before, so a country with little capital gains more from each new unit than a country that already has a lot. Poorer countries already use more advanced technology is false, since they generally lag the technology frontier. Richer countries are unable to invest in physical capital is false, since they invest heavily. Faster population growth raises output per person is false, since more people sharing the same output lowers output per person.
Category: Convergence
Question 10
On a graph that plots output per person against capital per person, what does an improvement in technology do?
Moves the economy down along the curve
Shifts the production function upward
✓
Shifts the production function downward
Turns the curve into a horizontal line
Correct Answer
Shifts the production function upward
Better technology lets the same capital per person produce more output, so the whole production function shifts upward. Moving the economy down along the curve would reflect less capital per person, not new technology. Shifting the production function downward would mean producing less with the same capital. Turning the curve into a horizontal line would mean added capital produces nothing extra, which is not what technology does.
Category: Components of Growth
Question 11
Output per person can rise even when no worker produces more per hour. Which change would cause this?
Population grows faster than total output
The overall price level rises
A larger share of the population becomes employed
✓
Each employee works fewer hours
Correct Answer
A larger share of the population becomes employed
If a larger share of the population holds jobs, total output rises relative to population, so GDP per capita increases even though each worker is no more productive. Population growing faster than total output would lower GDP per capita. A rise in the overall price level changes nominal values, not real output per person. Each employee working fewer hours would reduce output if hourly productivity is unchanged.
Category: Labor Productivity
Question 12
In the long run, what is the most important factor determining the average wage level in an economy?
The minimum wage
The inflation rate
The size of the population
Labor productivity
✓
Correct Answer
Labor productivity
Employers who pay less than the value a worker produces lose that worker to competitors, and those who pay more eventually suffer losses, so in the long run wages track productivity. The minimum wage sets a floor for some jobs but does not determine the average wage level over time. The inflation rate affects nominal wages, not real wages over the long run. The size of the population does not by itself raise what each worker produces.
Category: Labor Productivity
Question 13
A nurse's years of schooling and on-the-job experience are an example of which input to production?
Human capital
✓
Physical capital
Financial capital
Natural resources
Correct Answer
Human capital
Human capital is the knowledge, skills and expertise workers build through education and experience. Physical capital is plant, equipment and infrastructure. Financial capital is money and financial assets used to fund production. Natural resources are inputs from nature such as land and minerals.
Category: Components of Growth
Question 14
In a market-oriented economy, what gives individuals an incentive to invest in their own education and skills?
The government sets the wage for every skill
Workers with more skills can earn higher wages
✓
Firms are required by law to train every worker
Tuition for all schooling is fixed by law
Correct Answer
Workers with more skills can earn higher wages
In competitive markets, workers who build skills are rewarded with higher wages, and firms that invest in capital and training earn higher profits, so individual choices add up to growth. The government setting the wage for every skill describes central planning, not a market economy. Firms being required by law to train every worker is not how markets create incentives. Tuition for all schooling being fixed by law does not reward the student for gaining skills.
Category: Policies for Growth
Question 15
Economists use the word technology in a broad sense when studying growth. Which example counts as technology in that sense?
A larger number of identical machines
An extra year of schooling for workers
A new way of organizing work, such as the assembly line
✓
An increase in the size of the labor force
Correct Answer
A new way of organizing work, such as the assembly line
For growth, technology includes new products and inventions and also new ways of organizing production, such as the assembly line, along with better management methods. A larger number of identical machines is an increase in physical capital. An extra year of schooling for workers adds to human capital. An increase in the size of the labor force adds more workers rather than a better method.
Category: Components of Growth
Question 16
Which pattern do economists call convergence?
High-income economies grow faster than low-income economies
All economies grow at exactly the same rate
Low-income economies stop growing entirely
Low-income economies grow faster than high-income economies
✓
Correct Answer
Low-income economies grow faster than high-income economies
Convergence occurs when poorer economies grow faster than richer ones, so the income gap between them narrows over time. High-income economies growing faster would widen the gap, which is divergence. All economies growing at exactly the same rate would leave relative gaps unchanged. Low-income economies stopping growth entirely would widen the gap.
Category: Convergence
Question 17
Which argument suggests that poor countries may fail to catch up with rich countries?
New technology can offset diminishing returns in rich countries
✓
Poor countries can copy technologies already in use
Capital adds more output where it is scarce
Poor countries can learn from fast-growing economies
Correct Answer
New technology can offset diminishing returns in rich countries
If rich countries keep developing new technology, their production functions keep shifting upward, so their growth need not slow and poor countries may not catch up. Poor countries can copy technologies already in use is an argument for convergence. Capital adds more output where it is scarce is also an argument for convergence. Poor countries can learn from fast-growing economies likewise supports convergence.
Category: Convergence
Question 18
Real output per person rises from 40,000 dollars in one year to 42,000 dollars the next. What is the annual growth rate? Round to one decimal place.
4.8%
5.0%
✓
0.05%
50.0%
Correct Answer
5.0%
The growth rate is the change divided by the starting value: (42,000 - 40,000) / 40,000 = 0.05, or 5.0%. The value 4.8% divides by the ending value of 42,000 instead of the starting value. The value 0.05% forgets to multiply the decimal by 100. The value 50.0% misplaces the decimal point.
Category: Compound Growth
Question 19
Studies that split U.S. growth among its sources compare the role of workers' education and skills with that of machines and buildings. What do they conclude about education and skills?
They contribute nothing that can be measured
They matter only in low-income countries
They are at least as important as machines and buildings
✓
They are far less important than machines and buildings
Correct Answer
They are at least as important as machines and buildings
U.S. growth studies find that gains in education and skills are at least as important as added physical capital, so growth is about more than piling up machines and buildings. They contribute nothing that can be measured is wrong, since rising education is a measured source of growth. They matter only in low-income countries is wrong, since the finding is for the United States. They are far less important than machines and buildings reverses the finding.
Category: Growth Accounting
Question 20
In the per capita version of the aggregate production function, what is the output?
Physical capital per person
Human capital per person
Technology per person
GDP per capita
✓
Correct Answer
GDP per capita
When each input is divided by population, the aggregate production function shows how human capital, physical capital and technology per person produce GDP per capita. Physical capital per person is an input. Human capital per person is an input. Technology per person is also an input.
Category: Components of Growth