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ECO5POE S1 2013

Tutorial 7 Answers
Chapter 20: Economic Growth
Question 1 Brazils real GDP was 1,360 trillion reais in 2009 and 1,434 trillion reais in 2010. Brazils population was 191.5 million in 2009 and 193.3 million in 2010. Calculate: a. The economic growth rate. The economic growth rate is the growth rate of real GDP. Between 2009 and 2010 this growth rate is
1434 1360 100 5.4% 1360

b. The growth rate of real GDP per person. Brazils population grew at
193.3 191.5 100 0.9% 191.5

Brazils economic growth rate is 5.4 percent, so the growth rate of real GDP per person is 5.4%0.9% = 4.5%. c. The approximate number of years it takes for real GDP per person in Brazil to double if the 2010 economic growth rate and population growth rate are maintained. Brazils real GDP per person is growing at 4.5 percent a year. The rule of 70 tells us that Brazils real GDP per person will double in 70/4.5 = 15.6 years, which rounds to 16 years.

ECO5POE S1 2013

Question 5 Chinas Economy Picks Up Speed Chinas trend growth rate of real GDP per person was 2.2 percent a year before 1980 and 8.7 percent a year after 1980. In the year to August 2009, Chinas output increased by 11.3 percent. Source: World Economic Outlook and FT.com, September 14, 2009 Distinguish between a rise in Chinas economic growth rate and a temporary cyclical expansion. How long, at the current growth rate, will it take for China to double its real GDP per person? GDP growth will vary from one year to the next. Economic growth is the long-run growth, the economys average growth. It is best measured by the economys trend rate of growth. A cyclical expansion is temporary. Chinas long-run economic growth has averaged 8.7 percent since 1980. In 2009 Chinas annual growth rate was 11.3 percent. The excess of the one-year growth rate over the long-term economic growth is probably a temporary cyclical expansion. At the long-run growth rate of 8.7%, Chinas real GDP will double in 70/8.7 = 8.0 years. At the one-year growth rate of 11.3%, Chinas real GDP will double in 70/11.3 = 6.2 years. Use the following tables to work Problems 12 to 14. The first table describes an economys labour market in 2010 and the second table describes its production function in 2010.
Real wage rate (dollars per hour) 80 70 60 50 40 30 20 Labour hours supplied 45 40 35 30 25 20 15 5 10 15 20 25 30 35 5 10 15 20 25 30 35 40 Labour hours demanded Labour (hours) Real GDP (2009/10 dollars) 425 800 1,125 1,400 1,625 1,800 1,925 2,000

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Question 12 What are the equilibrium real wage rate, the quantity of labour employed in 2010, labour productivity, and potential GDP in 2010? The equilibrium real wage rate is $40 per hour and the equilibrium quantity of labour employed is 25 hours. With employment of 25 hours, the production function shows that potential GDP is $1,625. Labour productivity = $1,625/25 hours = $65.00 per hour. Question 13 In 2011, the population increases and labour hours supplied increase by 10 at each real wage rate. What are the equilibrium real wage rate, labour productivity, and potential GDP in 2011? The equilibrium real wage rate is $30 per hour and the equilibrium quantity of employment is 30 hours. With employment of 30 hours, the production function shows that real GDP is $1,800. Labour productivity = $1,800/30 hours = $60.00 per hour. Question 14 In 2011, the population increases and labour hours supplied increase by 10 at each real wage rate. Does the standard of living in this economy increase in 2011? Explain why or why not. The standard of living does not increase. In fact, it decreases because real GDP per person falls. The economy moves along its production function so that potential GDP increases but real GDP per person decreases. Question 18 In the economy of Cape Despair, the subsistence real wage rate is $15 an hour. Whenever real GDP per hour rises above $15, the population grows, and whenever real GDP per hour of labour falls below this level, the population 3

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falls. The table shows Cape Despairs production function. Initially, the population of Cape Despair is constant and real GDP per hour of labour is at the subsistence level of $15. Then a technological advance shifts the production function upward by 50% at each level of labour.

Labour (billions of hours per year) 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Real GDP (billions of 2009/10 dollars) 8 15 21 26 30 33 35

a. What are the initial levels of real GDP and labour productivity? Before the technological advance, labour productivity, which is defined as real GDP divided by employment, was $15.00 an hour. Real GDP was $15 billion and 1.0 billion hours of labour were employed. b. What happens to labour productivity immediately following the technological advance? Immediately following the technological advance, real GDP rises to $22.5 billion and employment remains at 1.0 billion hours. Labour productivity increases to $22.50 an hour. c. What happens to the population growth rate following the technological advance? Real GDP per hour exceeds the subsistence level of $15.00, so population growth increases.

ECO5POE S1 2013

d. What are the eventual levels of real GDP and real GDP per hour of labour? Eventually population growth will increase labour supply so that productivity will return to its subsistence level of $15.00 an hour. Real GDP will increase to $52.5 billion. Labour employment will equal 3.5 billion hours so that labour productivity equals $15.00.