Production and Growth-Part Two

In countries that experience political instability, standards of living tend to be low because of

• violations of diminishing returns.

• excessive levels of caloric intake.

• lack of respect for property rights.

• attempts by government officials to thwart the catch-up effect.

Accumulating capital

• requires that society sacrifice consumption goods in the present

• allows society to consume more in the present.

• decreases saving rates.

• involves no tradeoffs.

If there are diminishing returns to capital, then

• capital produces fewer goods as it ages.

• old ideas are not as useful as new ones.

• increases in the capital stock eventually decrease output.

• increases in the capital stock increase output by ever smaller amounts.

Other things equal, relatively poor countries tend to grow

• slower than relatively rich countries; this is called the poverty trap.

• slower than relatively rich countries; this is called the fall-behind effect.

• faster than relatively rich countries; this is called the catch-up effect.

• faster than relatively rich countries; this is called the constant-returns-to-scale effect.

Suppose a country reduces trade restrictions. This country would be pursing an

• inward policy, which most economists believe has beneficial effects on the economy.

• inward policy, which most economists believe has adverse effects on the economy

• outward policy, which most economists believe has beneficial effects on the economy.

• outward policy, which most economists believe has adverse effects on the economy.

Investment in physical capital, like investment in human capital, has an opportunity cost

• True

• False