Question

Questions 1-3 are about the role of various factors (institutions, technology, and capital accumulation) in the spectacular economic growth of East Asian economies. For example, high savings rates are an important feature of those economies and some observers have asked whether the high growth rates in those economies could explain their growth performances over the past several decades. This is the subject of Question 1.

Improving the business environment and creating strong incentives for innovation and adoption of new technologies have been other features of the region’s economies. These are the subject of Questions 2 and 3.

To analyze the potential role of such factors in growth, you will consider two hypothetical countries, A and B, that are identical in every respect. (They have the same preferences, institutions, technology, labor supply, population growth rates, savings rate, depreciation rate, and per capita capital stock.)

1. Assume that both countries, A and B, finance their investments entirely through their domestic savings. Starting this year, the people in Country A decide to save and invest a larger share of their income and maintain the new savings rate indefinitely in the coming years, while people in B maintain their previous saving and investment rates. If the returns to capital in both economies are diminishing, then Country A’s GDP will grow at

1. a faster rate than country B’s GDP in the next few years and many decades later.
2. a slower rate than country B’s GDP in the next few years and many decades later.
3. the same rate as country B’s GDP in the next few years and many decades later.
4. a faster rate in the next few years, but at the same rate as country B’s GDP many decades later.
5. a slower rate in the next few years, but at the same rate as country B’s GDP many decades later.
6. the same rate as country B’s GDP in the next few years, but at a faster rate many decades later.

2. Again, consider the two economies, A and B, described above. Starting this year, the government of Country B offers tax incentives to encourage the country’s businesses to invest more in order to expand employment. The government of Country A also offers the same amount of tax incentive and generates the same amount of additional investment, but it requires the investments to focus on the adoption of advanced technologies through R&D or through joint ventures and/or licensing with foreign companies. In this situation, Country A’s GDP will grow at

1. a faster rate than country B’s GDP in the next few years and many decades later.
2. a slower rate than country B’s GDP in the next few years and many decades later.
3. the same rate as country B’s GDP in the next few years and many decades later.
4. a faster rate in the next few years, but at the same rate as country B’s GDP many decades later.
5. a slower rate in the next few years, but at the same rate as country B’s GDP many decades later.
6. the same rate as country B’s GDP in the next few years, but at a faster rate many decades later.

3. Once again, consider the two economies, A and B, described above. The government of country A wants to help its economy to grow faster than country B’s economy over the next decades. Which one of the following policies is likely to contribute towards this goal in country A?

1. An increase in government expenditure to provide free lunches for officials and bureaucrats.
2. An increase in expenditure on national celebrations that create more government jobs.
3. A decrease in the rate of growth of money supply over the next decade.
4. A reform that makes the judiciary more independent, improves enforcement of property rights, and lowers the cost of doing business in the country.
5. All of the above.

Answer 1

Country A decide to save and invest a larger share of their income and maintain the new savings rate indefinitely in the coming years, while people in B maintain their previous saving and investment rates. If the returns to capital in both economies are diminishing, then Country A’s GDP will grow at

Ans:

1. a faster rate than country B’s GDP in the next few years and many decades later.

Because this action will provide more capital at cheaper cost for businesses.

1. Again, consider the two economies, A and B, described above. Starting this year, the government of Country B offers tax incentives to encourage the country’s businesses to invest more in order to expand employment. The government of Country A also offers the same amount of tax incentive and generates the same amount of additional investment, but it requires the investments to focus on the adoption of advanced technologies through R&D or through joint ventures and/or licensing with foreign companies. In this situation, Country A’s GDP will grow at

1. a faster rate than country B’s GDP in the next few years and many decades later.

Because in longrun R&D gives more returns.

1. Once again, consider the two economies, A and B, described above. The government of country A wants to help its economy to grow faster than country B’s economy over the next decades. Which one of the following policies is likely to contribute towards this goal in country A?
2. A reform that makes the judiciary more independent, improves enforcement of property rights, and lowers the cost of doing business in the country.

Because it will create an environment that supports economic growth.