Economic Growth, Productivity, and Living

Standards
February 9, 2025
Guanliang Hu

C ITY U NIVERSITY OF H ONG KONG

 Learning Objectives

Explore key facts about long-run economic growth across time

and countries
Discuss the primary determinants of long-run economic growth
Analyze why some countries remain poor and explore policies that
can promote economic growth

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 Long-run Economic Growth
When we speak of long-run economic growth, we mean the pro-
cess by which rising productivity increases the average standard of
living.
This is in contrast to the short-run swings in the economy inher-
ent to the business cycle, the alternating periods of economic
expansion and economic recession.

Output per Person in the U.S.

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 Living Standards

Health
Leisure
Quantity, quality, and variety of goods and services
 As the growth of the economy, we can enjoy
• larger quantity of goods and services (e.g., number of cars, phones,
PCs per household ...)
• higher quality of goods and services (e.g., smartphones have evolved
over the years with better displays, faster processors, enhanced
camera capabilities)
• more new products (i.e. more varieties), (e.g., from horse-drawn
carriages to motor vehicles and subsequently to electric vehicles )
...

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 Living Standards - Health (over time)

Life expectancy has dramatically increased in most parts of the

world in the past 100 years.

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 Living Standards - Health (cross countries)
In high-income countries, 6 or fewer out of 1,000 babies die by a
year of age.
In the poorest countries, the rate is more than 50 out of 1,000.

Health and income are closely related.

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 Living Standards - Leisure
Another good measure of our economic prosperity is the amount of
time we can spend on leisure.

As our lifespan grows, we can spend more time on leisure; and also,
as we grow more productive, we can devote less time to work, and
hence more to leisure.

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 Economic Growth over Time
The most commonly used measure of this average standard of living
is real GDP per capita: the amount of production in the economy, per
person, adjusted for changes in the price level.

DeLong’s estimated average annual growth rates for world economy

In 1,000,000 B.C.E. (Before the Common Era), our ancestors had a GDP per
capita of approximately $150 (in 2019 dollars).
The world GDP per capita in C.E. 1300 was also about $150.
After 1800, there were sustained increases in real GDP per capita.

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 Economic Growth over Time: Discussion

No sustained economic growth occurred before the Middle Ages;

a farmer in C.E. 1300 was about as well off his ancestors.
Significant economic growth did not really begin until the Indus-
trial Revolution, the application of mechanical power to the pro-
duction of goods
 Before this, production of most goods had relied on human or animal
power.
The difference between 1.3% and 2.3% may not seem like much
but over a long period, it makes a big difference.
 Over 100 years, a 1.3% growth rate leads to about a 260% increase
in real GDP per capita. But a 2.3% growth rate leads to about a
870% increase.
 Small differences in economic growth rates result in big long-term
differences in living standards.

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 Growth over Long Periods
Compound interest pays interest on the original deposit and all
previously accumulated interest
Given the annual interest rate i%:

t
How much will you have after t years = Original deposit × (1 + i%)
| {z }
Multiply by (1+i%) t times

$1 deposited at 1.3% interest rate after 100 years is $3.6

 $1 × (1.013)100 = $3.6
$1 deposited at 2.3% interest rate after 100 years is $9.7
 $1 × (1.023)100 = $9.7
 Around 2.7 times the value in the case of “1.3%”
Given the average annual growth rate (g%) between year x and
year x + t, we have,

Real GDP per capita in year x + t = Real GDP per capita in year x × (1 + g%)
t
| {z }
Multiply by (1+g%) t times

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 Effects of Different Growth Rates on Living Standards

Real GDP per Capita Growth in Real GDP per Capita Real GDP per Capita
Country
1960 (2011 U.S. dollars) 1960-2017 2017 (2011 U.S. dollars)
Nigeria $3,965 0.2% $4,375
Namibia $4,582 1.6% $11,142
Turkey $4,688 3.1% $26,650

Small annual differences in growth rates result in dramatic differ-

ences in living standards even after just around 60 years.

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 Years to Double - the Rule of 70

Useful formula to approximate the number of years it takes an initial

amount to double
Given annual growth rate (g%),

70
Years to double =
g

 If GDP grows at 2% then it takes 35 (= 70/2) years for GDP to double

 If GDP grows at 2.5% then it takes 30 (= 70/2.5) years for GDP to
double

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 (Optional) Derivation of the Rule of 70

g% = growth rate
T = Number of years to double
g
T
Double in T years means 2 = 1 × 1 + 100
Taking log on both sides and solving for T gives the rule of 70:

ln(2) 0.7 70
T = g
≈ g =
ln 1 + 100 100
g

• ln(·) is the base e logarithm

• ln(2) = 0.693147 ≈ 0.7

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 GDP per Capita in 2022 for Each of the World’s Areas
The figure shows GDP per capita in 2022 for each of the world’s na-
tions, adjusted for differences in the cost of living.

The current large differences in GDP per capita can come from a (rel-
atively) small difference in long-term growth rates
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 Real GDP per Person, 1870-2010 (in U.S. Dollars)

In the U.S., real GDP per capita has risen more than eight-fold
since 1900; Roughly speaking, the average American can buy
more than eight times as many goods and services now as in
1900.
Growth rates vary enormously across countries over long periods
of time.
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 Differences in Incomes across Countries

Many countries are still poor in term of real GDP per capita; and
the gap is increasing.

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 Differences in Incomes across Countries (Conti.)

Some less developed economies caught up to more developed

economies in terms of real GDP per capita.
 For example:

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 What Determines the Rate of Long-Run Growth?

Real GDP = Labor productivity × Number of workers

| {z } | {z } | {z }
Y Y /N N

= Real GDP per capita × Population

| {z } | {z }
Y /POP POP

⇒
Number of workers
Labor productivity × = Real GDP Per capita
Population | {z }
Y /POP
| {z }
N/POP

Real GDP per capita increases when

 Labor productivity (Y /N, output per worker) increases OR
 Share of the population employed (0 ≤ N/POP ≤ 1) increases

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 U.S. Real GDP per Person, 1960-2019

The U.S. Real GDP per Person tripled from 1960 to 2019, which
is a 200% increase.

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 U.S. Population Employed and Labor Force Participa-
tion Rate, 1960-2019

The U.S. employed population increased by 50% from 1960 to

2020.

Employed Labor Force Working Age Population

Share of population with jobs = × ×
| {z } Labor Force Working Age Population Population
| {z }
N
| {z }
POP 1 - Unemployment rate Labor Force Participation Rate

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 Trends in the Labor Force by Gender

The labor force participation rate of adult men has declined gradually
since 1948. But it has increased significantly for adult women, making
the overall rate higher today than it was then.
Recently, the rate for women has declined also.

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 U.S. Real GDP per Person and Average Labor Produc-
tivity, 1960-2019

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 Determinants of Average Labor Productivity

From “what determines the rate of long-run growth?” to “what

determines labor productivity growth?”
In the long run, increases in output per person and hence living stan-
dards arise primarily from increases in average labor productivity
Six factors determine average labor productivity
 Land and other natural resources
 Physical capital
 Human capital
 Technology
 Entrepreneurship and management
 Political and legal environment

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 #1 Land and Other Natural Resources

More inputs (Land and Other Natural Resources) increase worker

productivity
 Land for farming
 Manufacturing requires raw materials and energy
• Resources can be obtained through international markets
• Japan, Hong Kong, Singapore and Switzerland have high levels of
GDP per capita with a limited resource base

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 #2 Physical Capital

More and better capital increases worker productivity (i.e., output

per hour)

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 Diminishing Returns to Capital
But at a decreasing rate: diminishing returns to capital
 the value of marginal product is decreasing
Diminishing returns to capital occurs if an addition of capital with
other inputs held constant increases output by less than the pre-
vious increment of capital
 Assumption: all inputs except capital are held constant
 Result: output increases at a decreasing rate
When a firm has many machines, the most productive uses have
already been filled
 The increment in capital will necessarily be assigned to a less pro-
ductive use than the previous increment
Candy factory owner employs two people and adds capital
 Each machine requires at least one dedicated operator
Number of Machines Output per Week Hours Worked per Week Candies per Hour Worked
0 16,000 80 200
1 32,000 80 400
2 40,000 80 500
3 40,000 80 500

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 Per-worker Production Function
Increasing capital will increase output and labor productivity
 Positive contribution to growth
There are limits to increasing productivity by adding capital be-
cause of diminishing returns

A per-worker production function describes the relationship between

real GDP per hour worked and capital per hour worked, holding every-
thing else constant.
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 Quiz

Based on the accompanying table and assuming that returns to cap-

ital are positive but diminishing, then total packages wrapped when a
fourth machine is installed must be packages.

Number of (Identical) Machines Total Packages Wrapped

1 10,000
2 13,000
3 15,000

A) more than 16,000

B) more than 2,000
C) less than 17,000
D) less than 15,000

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 Quiz
Based on the accompanying table and assuming that returns to cap-
ital are positive but diminishing, then total packages wrapped when a
fourth machine is installed must be packages.

Number of (Identical) Machines Total Packages Wrapped

1 10,000
2 13,000
3 15,000

A) more than 16,000

B) more than 2,000
C) less than 17,000
D) less than 15,000
Answer: (C); The marginal return to the first machine was 10,000 packages, the marginal return
to the second machine was 3,000 packages (13,000-10,000), and the marginal return to the third
machine was 2,000 packages (15,000- 13,000). Thus, the marginal return to the third machine has
to be less than 2,000 packages, which makes the total less than 17,000 packages.

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 #3 Human Capital

Human capital comprises the talents, education, training, and skills

of workers
 Human capital increases workers’ productivity
• Professional scientists and engineers
• Apprentice and on-the-job training
• Early education
Cost-benefit principle applies to building human capital
 Cost: time (and/or training fee)
 Benefit: higher skill → more productive → higher wage (Premium
paid to skilled workers)

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 #4 Technology

New technologies are the single most important source of produc-

tivity improvement
• Information and Communication Technology (ICT)
• Automation and Robotics
• Artificial Intelligence (AI) and Machine Learning (ML)
• E-commerce and Digital Services
• ......

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 Productivity Puzzle

U.S. labor productivity grew 2.5% from 1948–1973

 Slowed to 1.1% from 1973 – 1995
 Resurgence to 2.4% between 1995 – 2000
 1.5% 2000–2007 and 1.0% 2007 – 2019
Growth since 1995 is largely attributed to information and com-
munications technologies making workers more productive
 Growth seen in industries that produce these technologies and in-
dustries that use them
 Slower growth in sectors that do not use these technologies
Recent slow-down remains a mystery
 Is it because the growth of technology has become slow?

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 #5 Entrepreneurship and Management

Entrepreneurs create new economic enterprises

 Turn ideas into new products and services that people need
• Henry Ford and moving assembly line (for mass production)
• Bill Gates and standardized graphical user interface operating system
• Larry Page and Sergey Brin and Google’s search
 Essential to a dynamic, healthy, growing economy
• Creative destruction
 Policies should channel entrepreneurship in productive ways
• Regulation and high taxes discourage entrepreneurship
Managers run business on a daily basis (e.g., from the supervisor
of the loading dock to the CEO)
 To satisfy customers, deal with suppliers, organize the production,
obtain financing, assign workers to jobs, and motivate them to work
hard and effectively.
 Each activities enhance labor productivity

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 #6 Political and Legal Environment

Maintain political stability

 Example: Ethiopia’s real GDP per capita was lower in 2003 than
in 1965 due to revolutions, civil war, and war with Eritrea. When it
returned to peace, it experienced growth: 8.4 percent per year, from
2003 to 2018.
Good Legal Environments
 Encourage people/firms to be economically productive
 Promote free and open exchange of ideas
 Well-defined property rights are essential
· Property rights are the rights individuals or firms have to the exclusive
use of their property, including the right to buy or sell it. (Who owns
what and how those things can be used)
· Protected by law (Reliable recourse through courts)

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 Neoclassical Economic Growth Model

If a country is relatively lacking in capital – like many of the developing

countries – increases in capital will be very effective at increasing real
GDP per capita.

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 The Catch-up Predicted by the Economic Growth Model

If poorer areas grow faster than richer ones, they will start to catch up
to, or converge to, the richer countries.
Catch-up: the prediction that the level of GDP per capita (or income
per capita) in poor areas will grow faster than in rich areas.
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 There Has Been Catch-up among High-Income Areas

Examining high-income areas, we appear to see strong evidence of

the catch-up hypothesis.
Areas that were richer in 1960, like the U.S. and Switzerland, experi-
enced lower growth rates over the next decades than areas that were
initially poorer, like Singapore and South Korea.

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 Most of the World Hasn’t Been Catching Up

However if we extend the set of areas to all areas for which statistics
are available, our catch-up model appears to be worthless.
We need to address the failures of the catch-up model.

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 Why isn’t the Whole World Rich?

The economic growth model predicts that poor countries will grow
faster than rich countries. This is because:
The effect of additional capital is greater for countries with smaller
capital stocks
There are greater advances in technology immediately available
to poorer countries
Economists point to four key factors in explaining why many low-income
countries are growing so slowly:
Low rates of saving and investment (related to physical capital)
Poor public education and health (related to human capital)
Wars and revolutions (related to political environment)
Failure to enforce the rule of law (related to legal environment and
entrepreneurship)

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 Reasons for Lack of Growth in Poor Countries

Low rates of saving and investment

Undeveloped and insecure financial systems create a “vicious cy-
cle” of low savings and investment, preventing growth.
One way to exit the vicious cycle of low savings and investment is
through foreign investment:
Poor public education and health
With weak public schools and poor health care, workers are less
productive.
limited ability to imitate high technology
Wars, and revolutions (political instability)
Wars, and revolutions make investment and technological growth
difficult (such as the previous example of Ethiopia)
Lack of political stability also discourages foreign investment

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 Failure to Enforce the Rule of Law

The rule of law refers to the ability of a government to enforce the laws
of the country, particularly with respect to protecting private property
and enforcing contracts.
For entrepreneurs in a market economy to succeed, the government
must guarantee property rights
Otherwise, entrepreneurs will not risk starting a business

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 Why Hasn’t Mexico Grown as Fast as China?

After reform and opening-up, China’s economic growth is unleashed.

Mexico still suffers from a corrupt government, weak rule of law,
and a weak court system that discourages financial contracting.
 Corruption creates uncertainty about property rights and drains fi-
nancial resources out of the country
Faster Chinese growth has now removed the gap between Mexi-
can and Chinese real GDP per capita

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 Promote Growth with Savings and Investment

Government policies can encourage new capital formation and

saving in the private sector
 Individual Retirement Accounts (IRAs) are an incentive for individu-
als to save
 Government periodically offers investment tax credits
Government can invest directly in capital formation
 Construction of infrastructure such as roads, bridges, airports, and
dams
Attract foreign investments

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 Promote Growth with Human Capital

Governments support education and training programs

 Public education: from kindergarten through institutions of higher
learning
 Head Start program for pre-school children
 Job training and retraining programs
Government pays because
 Education has positive externalities
• A more educated society can improve everyone’s productivity
• Increases chances of technical innovation
 Poor families could not pay
• Redistribution of wealth

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 Promote Growth with R&D Support (technology)

Research and development (R&D) promotes innovation

 Encourage firms to do R&D (such as tax deduction)
 Some types of research, such as basic science, create externalities
that a private firm cannot capture
• Fund basic science with National Science Foundation (NSF) and other
government grants
Government sponsors research for military and space applica-
tions
 Government owns Beidou (China) or GPS (U.S.) satellites

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 Promote Growth with Political and Legal Environment

Maintain political and legal framework to support growth.

Example:
 Use peaceful means to resolve disputes
 Establish an independent court system to enforce contracts

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 Costs of Capital Accumulation to Foster Economic Growth

Increasing the capital stock will increase GDP, but

Opportunity cost of producing more capital goods is
 Fewer consumer goods in the short run
• People may be willing to forego present consumption to have more in
the future
 Reduced leisure time
 The cost of research and development (R&D) to improve technology
 The cost of education to develop and use new capital
 Possible risks of health and safety from rapid capital production (?)

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 Limits to Growth

Can growth be sustained?

• NO
 Depletion of some natural resources
 Environmental damage and global warming
• YES
 Power of market and other mechanisms to deal with scarcity
 New or higher-quality inputs, rely less on nature resources (e.g.
from using wood to using synthetic materials)
 Environmental protection technology

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 Is Economic Growth Good or Bad?

A central assumption of this chapter is that economic growth is bene-

ficial for citizens.
Arguments against growth might include:
Negative effects on the environment
Depletion of natural resources
Diminishment of distinctive cultures
Since many of these arguments are normative, economic analysis can
contribute to the debate but cannot settle the issue.

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 Quiz 1

Small differences in annual growth rates of real GDP generate large

differences in real GDP over time because of the
A) importance of average labor productivity.
B) power of compound interest.
C) diminishing returns to capital.
D) limits of economic growth.

Quizzes

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 Quiz 1

Small differences in annual growth rates of real GDP generate large

differences in real GDP over time because of the
A) importance of average labor productivity.
B) power of compound interest.
C) diminishing returns to capital.
D) limits of economic growth.

Answer: (B); Compound interest pays interest on previously earned in-

terest, so small differences in growth rates expand into big differences
over time.

Quizzes

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 Quiz 2

If real GDP per person were equal to $4,000 in 1900 and grew at a 1
percent annual rate, what would be the value of real GDP per person
100 years later?
A) $4,200
B) $8,000
C) $10,819
D) $40,000

Quizzes

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 Quiz 2

If real GDP per person were equal to $4,000 in 1900 and grew at a 1
percent annual rate, what would be the value of real GDP per person
100 years later?
A) $4,200
B) $8,000
C) $10,819
D) $40,000

Answer: (C); At one percent growth, the future value equation is: Fu-
ture GDP = $4,000 ×1.01100 = $10,819.

Quizzes

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 Quiz 3

The key variable in determining changes in a country’s standard of

living is the
A) interest rate.
B) inflation rate.
C) unemployment rate.
D) long-run rate of economic growth.

Quizzes

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 Quiz 3

The key variable in determining changes in a country’s standard of

living is the
A) interest rate.
B) inflation rate.
C) unemployment rate.
D) long-run rate of economic growth.

Answer: (D); The long-run rate of economic growth best explains changes
in standards of living in countries around the world.

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 Quiz 4

A nation’s standard of living, as measured by real GDP per person,

increases
A) only if average labor productivity increases.
B) only if the share of population employed increases.
C) only if both average labor productivity and the share of population
employed increase.
D) if either average labor productivity and/or the share of population
employed increase.

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 Quiz 4

A nation’s standard of living, as measured by real GDP per person,

increases
A) only if average labor productivity increases.
B) only if the share of population employed increases.
C) only if both average labor productivity and the share of population
employed increase.
D) if either average labor productivity and/or the share of population
employed increase.

Answer: (D); To find real GDP per person, multiply the average output
each worker produces times the percentage of population employed.
Real GDP per person can only grow if one of these factors increases.

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 Quiz 5

If 60 percent of the population in a country is employed and average

labor productivity equals $32,000, then real GDP per person equals
A) $19,200.
B) $53,333.
C) $60,000.
D) $32,000.

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 Quiz 5

If 60 percent of the population in a country is employed and average

labor productivity equals $32,000, then real GDP per person equals
A) $19,200.
B) $53,333.
C) $60,000.
D) $32,000.

Answer: (A); To find real GDP per person, which gives the standard
of living, multiply the average output each worker produces times the
percentage of population employed. In this case, real GDP per person
equals ($32,000 × 0.60) = $19,200.

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 Quiz 6

Suppose that the share of population employed in Country C is 50

percent, and that Countries C and D have the same real GDP per
capita. Based on the information in the table, what share of Country
D’s population must be employed?

Country Population (millions) Average Labor Productivity ($)

C 75 25,000
D 250 50,000

A) 12.5 percent
B) 25 percent
C) 75 percent
D) 100 percent

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 Quiz 6
Suppose that the share of population employed in Country C is 50
percent, and that Countries C and D have the same real GDP per
capita. Based on the information in the table, what share of Country
D’s population must be employed?

Country Population (millions) Average Labor Productivity ($)

C 75 25,000
D 250 50,000

A) 12.5 percent
B) 25 percent
C) 75 percent
D) 100 percent
Answer: (B); To find real GDP per person, multiply the average output each worker produces times
the percentage of population employed. In this case, average labor productivity in Country C is
$25,000 and share of population employed is 0.50, so real GDP per person is $12,500. For Country
D to also have real GDP per person of $12,500, then the share of population working × the average
labor productivity of $50,000 must be $12,500. Solving for the share of population working, by
dividing each side by the real GDP, we get $12,500/$50,000 = 0.25, or 25 percent.
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 Quiz 7

In the long run, increases in output per person arise primarily from
A) increases in female labor force participation.
B) increases in male labor force participation.
C) an increasing proportion of the population retiring.
D) increases in average labor productivity.

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 Quiz 7

In the long run, increases in output per person arise primarily from
A) increases in female labor force participation.
B) increases in male labor force participation.
C) an increasing proportion of the population retiring.
D) increases in average labor productivity.

Answer: (D); Increased average labor productivity is the foremost rea-

son why nations become rich.

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 Quiz 8

A worker learning how to use a new business-related software pro-

gram is an example of investing in
A) human capital.
B) physical capital.
C) research and development
D) the stock market.

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 Quiz 8

A worker learning how to use a new business-related software pro-

gram is an example of investing in
A) human capital.
B) physical capital.
C) research and development
D) the stock market.

Answer: (A); Investments to develop worker skills is human capital

investment.

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 Quiz 9

Countries with small amounts of capital per worker tend to have

levels of real GDP per person and levels of average labor pro-
ductivity.
A) high; high
B) high; low
C) low; low
D) low; average

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 Quiz 9

Countries with small amounts of capital per worker tend to have

levels of real GDP per person and levels of average labor pro-
ductivity.
A) high; high
B) high; low
C) low; low
D) low; average

Answer: (C); Countries with small amounts of capital per worker suffer
from low productivity; this results in low real GDP per person.

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 Quiz 10

The principle of diminishing returns to capital states that if the amount

of labor and other inputs employed is held constant, then the greater
the amount of capital in use the
A) less is produced.
B) less production is wasted.
C) the more an additional unit of capital adds to production.
D) the less an additional unit of capital adds to production.

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 Quiz 10

The principle of diminishing returns to capital states that if the amount

of labor and other inputs employed is held constant, then the greater
the amount of capital in use the
A) less is produced.
B) less production is wasted.
C) the more an additional unit of capital adds to production.
D) the less an additional unit of capital adds to production.

Answer: D; This is the definition of the principle of diminishing returns

as applied to addition of capital stock.

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 Quiz 11

Alpha has $40,000 of capital per worker, while Beta has $5,000 of
capital per worker. In all other respects, the two countries are the
same. According to the principle of diminishing returns to capital, an
additional unit of capital will increase output in Alpha compared
to Beta, holding other factors constant.
A) more
B) less
C) not at all
D) by the same amount

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 Quiz 11

Alpha has $40,000 of capital per worker, while Beta has $5,000 of
capital per worker. In all other respects, the two countries are the
same. According to the principle of diminishing returns to capital, an
additional unit of capital will increase output in Alpha compared
to Beta, holding other factors constant.
A) more
B) less
C) not at all
D) by the same amount

Answer: (B); Since Alpha starts out with more capital per worker, the
marginal increase in worker output in Alpha is less than the marginal
increase in Beta (where workers have much less capital to begin with).

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 Quiz 12

Based on the accompanying table and assuming that returns to cap-

ital are positive but diminishing, then total packages wrapped when a
fourth machine is installed must be packages.

Number of (Identical) Machines Total Packages Wrapped

1 20
2 23
3 25

A) more than 26
B) more than 12
C) less than 27
D) less than 25

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 Quiz 12
Based on the accompanying table and assuming that returns to cap-
ital are positive but diminishing, then total packages wrapped when a
fourth machine is installed must be packages.

Number of (Identical) Machines Total Packages Wrapped

1 20
2 23
3 25

A) more than 26
B) more than 12
C) less than 27
D) less than 25
Answer: (C); The marginal return to the first machine was 20 packages, the marginal return to
the second machine was 3 packages (23-20), and the marginal return to the third machine was 2
packages (25- 23). Thus, the marginal return to the third machine has to be less than 2 packages,
which makes the total less than 27 packages.

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 Quiz 13

The introduction of new technologies that allow producers to special-

ize in those activities in which they are relatively more efficient is an
example of how overall productivity increases because of the
A) principle of comparative advantage.
B) scarcity principle.
C) equilibrium principle.
D) incentive principle.

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 Quiz 13

The introduction of new technologies that allow producers to special-

ize in those activities in which they are relatively more efficient is an
example of how overall productivity increases because of the
A) principle of comparative advantage.
B) scarcity principle.
C) equilibrium principle.
D) incentive principle.

Answer: (A); This example illustrates the Principle of Comparative Ad-

vantage, that overall productivity increases when producers concen-
trate on those activities at which they are relatively most efficient.

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 Quiz 14

People who run businesses on a day-to-day basis are called

A) entrepreneurs.
B) engineers.
C) business managers.
D) technology experts.

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 Quiz 14

People who run businesses on a day-to-day basis are called

A) entrepreneurs.
B) engineers.
C) business managers.
D) technology experts.

Answer: (C); This is the definition of business managers. Note: they

are different from entrepreneurs because entrepreneurs take risks whereas
business managers often do not.

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 Quiz 15

A political system that promotes the free and open exchange of ideas
A) will not have well-defined property rights.
B) slows the development of new technologies and products.
C) increases average labor productivity.
D) is detrimental to economic growth.

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 Quiz 15

A political system that promotes the free and open exchange of ideas
A) will not have well-defined property rights.
B) slows the development of new technologies and products.
C) increases average labor productivity.
D) is detrimental to economic growth.

Answer: (C); Political stability and transparency creates a favorable

business climate because firm owners can rely on government rules.

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 Quiz 16

Governments contribute to increased average labor productivity in each

of the following ways except by
A) establishing well-defined property rights.
B) maintaining political stability.
C) imposing taxes on wages.
D) allowing the free and open exchange of ideas.

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 Quiz 16

Governments contribute to increased average labor productivity in each

of the following ways except by
A) establishing well-defined property rights.
B) maintaining political stability.
C) imposing taxes on wages.
D) allowing the free and open exchange of ideas.

Answer: (C); Imposing taxes on wages discourage work, which re-

duces labor productivity.

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 Quiz 17

The cost of a higher living standard in the future is giving up

A) current consumption.
B) current investment.
C) future consumption.
D) future investment.

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 Quiz 17

The cost of a higher living standard in the future is giving up

A) current consumption.
B) current investment.
C) future consumption.
D) future investment.

Answer: (A); If society saves today it can expand its capital stock and
increase living standards in the future. However, this expansion of
capital stock means giving up resources that could be used for current
consumption.

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