GDP And Economic Growth 4 — Questions and Answers
Question 1: How does a higher national savings rate typically affect long-run economic growth?
- It reduces growth by decreasing consumer spending
- It has no effect on long-run growth
- It funds more investment, raising the capital stock and productivity (Correct answer)
- It causes inflation, which erodes real GDP
Correct answer: It funds more investment, raising the capital stock and productivity
Higher savings provide the funds for investment in physical and human capital, increasing productive capacity over time.
Question 2: Which measure captures economic well-being more accurately than GDP alone?
- Nominal GDP
- GDP per capita (Correct answer)
- Gross national income
- The consumer price index
Correct answer: GDP per capita
GDP per capita divides total output by population, giving a better picture of average living standards than total GDP alone.
Question 3: What is the 'output gap' and how is it calculated?
- The difference between exports and imports
- Actual GDP minus potential GDP (Correct answer)
- The gap between nominal and real GDP
- The difference between government revenue and expenditure
Correct answer: Actual GDP minus potential GDP
The output gap equals actual GDP minus potential GDP, indicating whether the economy is overheating or underperforming.
Question 4: Which country characteristic is most strongly associated with sustained high economic growth rates?
- Large geographic area
- Abundant natural resources
- Strong institutions and rule of law (Correct answer)
- High population density
Correct answer: Strong institutions and rule of law
Research consistently finds that strong institutions — property rights, rule of law, and low corruption — are key drivers of sustained growth.
Question 5: In endogenous growth theory, what drives long-run growth UNLIKE in the Solow model?
- Exogenous technological shocks from outside the economy
- Factors within the economy such as knowledge, innovation, and education (Correct answer)
- Population growth rates
- Trade surpluses and foreign exchange reserves
Correct answer: Factors within the economy such as knowledge, innovation, and education
Endogenous growth theory argues that long-run growth is driven by internal factors like knowledge spillovers, innovation, and human capital investment.
Question 6: A country's real GDP grows from $10 trillion to $10.3 trillion. What is the growth rate?
- 0.3%
- 3% (Correct answer)
- 30%
- 1.3%
Correct answer: 3%
Growth rate = (10.3 - 10) / 10 × 100 = 3%.
Question 7: How does infrastructure investment (roads, bridges, broadband) affect economic growth?
- It reduces productivity by crowding out private investment
- It raises private sector productivity and lowers transaction costs, boosting growth (Correct answer)
- It only benefits government workers and has no GDP effect
- It increases inflation without adding real output
Correct answer: It raises private sector productivity and lowers transaction costs, boosting growth
Public infrastructure lowers costs of doing business and raises private sector productivity, complementing private investment and spurring growth.
GDP And Economic Growth 4
How does a higher national savings rate typically affect long-run economic growth?