Economics Quiz on Production Functions

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Questions and Answers

What does the marginal product of labor depend on according to the Cobb-Douglas function?

The number of machines available in the market

The total amount of ice cream produced

The fixed price per ice cream in the market

The average amount each worker produces, $Y/L$ (correct)

In a general equilibrium model with multiple markets, how is the optimal hiring of labor and capital determined?

When the marginal products of each input equal the wages and rental prices (correct)

By maximizing the profit function without regard to marginal products

When the total output equals the total cost of inputs

Through a fixed proportion of labor to capital in production

What is represented by the fixed price per ice cream in the market?

The demand curve for labor

The profitability of the firm

The total capital employed in the production

The numeraire for setting other prices in the economy (correct)

What is the role of the production function in the firm's profit maximization process?

To define the relationship between inputs and the maximum output produced Signup and view all the answers

What happens to the marginal product of capital as more labor is added while keeping capital constant?

It decreases due to the law of diminishing returns Signup and view all the answers

Which country experienced a significant decline in income relative to the United States after 1995?

Japan Signup and view all the answers

What was the percentage of U.S. income for Sub-Saharan Africa in 1980?

7.5 percent Signup and view all the answers

Which of the following countries has shown significant income growth relative to the U.S. since 1980?

China Signup and view all the answers

Which statement best describes the movement of countries relative to the U.S. income level as per the data?

Some countries have experienced relative decline while others have risen. Signup and view all the answers

What income level did Japan achieve relative to the U.S. in 1995?

85 percent Signup and view all the answers

By 2000, what was Sub-Saharan Africa's income level as a percentage of U.S. income?

3.3 percent Signup and view all the answers

How did the income levels of countries scatter around the 45-degree line in the provided data?

No systematic pattern, widely scattered Signup and view all the answers

What trend was observed in the world income distribution from 1960 to the late-1990s?

Widening of income distribution Signup and view all the answers

By 2011, how much poorer were both El Salvador and the Democratic Republic of the Congo relative to the United States?

128 times poorer Signup and view all the answers

What method was used to examine income dynamics across countries from 1960 to 2010?

Using decadal growth rates Signup and view all the answers

How many countries were sorted based on their income relative to the US for the analysis?

107 countries Signup and view all the answers

What is implied by computing the stationary distribution of countries across income bins?

Sample probabilities remain constant forever Signup and view all the answers

Which country was mentioned as being 50 times poorer than the United States in 1960?

Mozambique Signup and view all the answers

What challenges are highlighted in measuring an economy?

The inclusion and exclusion of various economic activities Signup and view all the answers

What was the income comparison mainly focused on regarding the countries in the sample?

Comparison to the GDP per person Signup and view all the answers

What was the status of the income distribution pattern in the last decade before 2010?

Stabilized Signup and view all the answers

Which transaction does not contribute to the GDP in Pickupia?

Pickupia's consumers importing goods from foreign countries. Signup and view all the answers

What is the capital gain when you sell an asset for more than you paid for it?

The difference between the sale price and initial purchase price. Signup and view all the answers

Why aren’t capital gains considered part of GDP?

They do not involve a new production of goods or services. Signup and view all the answers

In the scenario where a rural area is affected by an earthquake, what will happen to the housing stock?

10 percent of it will be destroyed. Signup and view all the answers

What was the Indian GDP in 2010 expressed in rupees?

78.9 trillion rupees. Signup and view all the answers

What is the significance of the price level ratio between India and the United States?

It reflects living costs between the countries. Signup and view all the answers

What is the primary reason for the difference in GDP ratios between India and the United States?

Differences in relative prices and purchasing power. Signup and view all the answers

Which of the following transactions contributes to GDP calculations?

Purchasing new trucks from TruckCo. Signup and view all the answers

How much worth of trucks do foreign countries purchase from TruckCo?

50 dollars. Signup and view all the answers

If Pickupia's government buys 150 dollars worth of trucks, what type of spending is this classified as within GDP?

Government spending. Signup and view all the answers

What was the fraction of the world's population living in countries with a per capita GDP less than 5 percent of the 2010 U.S. level in 1960?

2 out of 3 Signup and view all the answers

By 2010, what was the fraction of the world’s population still living in extreme poverty?

Less than 1 out of 12 Signup and view all the answers

Which countries are identified as accounting for more than a third of the world’s population contributing to economic growth?

India and China Signup and view all the answers

If z is defined as the ratio of two growing variables, x and y, which statement is true when both grow at the same rate?

the ratio must remain constant Signup and view all the answers

Which rule applies to the growth rates of the product of two variables x and y?

gz = gx + gy Signup and view all the answers

In terms of living standards over the past four decades, what has been observed for the median human?

Living standards have dramatically risen Signup and view all the answers

When measuring economic progress, how does per capita GDP provide a different perspective than overall country GDP?

It accounts for population growth Signup and view all the answers

What was the approximate number of people living below the poverty threshold as determined by economic growth, instead of if the distribution had remained unchanged since 1960?

About 600 million Signup and view all the answers

What does the rule gz = a.gx denote in terms of growth rates?

Growth rate of exponentiation Signup and view all the answers

How did the rankings of global poverty change from 1960 to 2010?

A substantial reduction in global poverty Signup and view all the answers

Study Notes

Development Economics 1

Lecture 1 - The Facts of Economic Growth:
- VUONG Hung Cuong, AEI International School, Université Paris-Est Créteil, September 11, 2024
- Introduction of Development economics
- Why do the richest countries grow at 2 percent per year?
- Why are some countries 50x richer than others?
- Economic Growth vs Economic Development
Lecture 1 - Introduction (Continued)
- Name that Country:
  - Low life expectancy
  - High infant mortality rate
  - High rate of households without essential services.
Lecture 1 - The Power of Economic Growth
- U.S. transformation over a century
- Increased standards of living
- Rise in life expectancy (1900-2024)
- Historical example of the Great financier Nathan Rothschild
  - Poorer than contemporary Americans in terms of wealth
  - Would likely prefer antibiotics to gold plate
Lecture 1 - Plan
- Growth patterns of the richest countries
- Economic growth throughout the world (catching up, falling behind, staying in place)
- Characteristics of countries in various groups
Lecture 1 - Growth Pattern (Example of US Data)
- GDP per person in the US has grown at a steady rate of around 2% per year for 150 years.
- Starting with ~3,000 USD in 1870, per capita GDP reached ~50,000 USD by 2014.
- The Great Depression caused a significant decline in income, but it was temporary
Lecture 1 - Growth Pattern (Continued)
- Stability of U.S. Growth (1870-2007) — averaged 2.03% per year.
- Stability of Growth (1929-2007) — averaged 2.23% per year.
- Growth (1900-1950) — averaged 2.06%.
- Growth (1950-2007) — averaged 2.16%.
Lecture 1 - Growth Pattern (Continued)
- Growth (1950-1973) — averaged 2.50%
- Growth (1973-1995) — averaged 1.82%.
- Growth (1995-2007) — averaged 2.13%
- Growth patterns — mixed results since 1950.
Lecture 1 - Living Standards
- Exponential Growth in Living Standards
  - A very recent phenomenon
- Doubling of Living Standards
  - Between 1 AD and 1820 the standard of living in the West doubled.
  - Over next 200 years GDP per person rose more than 20x
Lecture 1 - Economic Development
- Why some countries are richer than others?
- Through the lens of a production function
- Inputs versus productivity
- Why do some countries have more inputs/why more efficient?
- Rules and institutions
- Catch up growth (how to understand it)
Lecture 1 - Economic Development (Korea Example)
- Korea before World War II
- Shared cultural heritage, government, and geography
- North Korea had economic advantages (e.g., resources)
- Division after war — different rules led to dramatic growth differences.
Lecture 1 - Economic Development (Additional Examples)
- Similar "natural" experiments in other regions (e.g., post-WWII Germany, China)
- Historical patterns of economic growth and development
Lecture 1 - Growth is spreading across countries
- The Great Divergence
  - Growth spread unevenly over time
- The difference in the rate of growth among countries is due to the different start times for growth
Lecture 1 - Growth spreading across countries (continued)
- Inequality in Income, 1300 AD.
- Inequality in Income, 1950 AD and 2010 AD.
- How growth is spreading in countries over time.
Lecture 2 - Introduction
- How to measure the economy?
- What should we include?
- What should we leave out?
- Adding dissimilar elements (automobile production, grocery store employment, and home sales) to one number, showing the status of the economy.
- Composition of GDP over time and across countries
Lecture 2 - Gross Domestic Product (GDP)
- Definition, example of U.S. GDP in 2021
- Market Value — meaning that GDP is valued in a certain currency (e.g., dollars)
- "Final"—implies that sales of used items aren't included in GDP
- "Produced"—purely financial transactions aren't included (e.g., stock sales and money transfers)
- Services. Transportation, medical care, and tourism.
Lecture 2 - Measurement of GDP (Production, Expenditure, Income approaches)
Lecture 2 - Expenditure Approach to GDP
- National income accounts
- GDP = Consumption (C) + Investment (I) + Government Purchases (G) + Net Exports(NX)
Lecture 2 - Expenditure Approach to GDP (U.S. 2012 Data)
- Breakdown of GDP spending categories in 2012
  - Consumption, Investment, Government Purchases, Net Exports (Exports-Imports)
Lecture 2 - Expenditure Approach to GDP (Composition and Trends)
- Relative stable share in total GDP over the past 90yrs.
Lecture 2 - The Income Approach to GDP
- National income accounting perspective
- every dollar of product sold ➞ dollar of income earned.
Lecture 2 - Key Aspects of the Income Approach
- Compensation of employees
- Wages and salaries are benefits
- Taxes, Net operating surplus of businesses
- Depreciation
Lecture 2 - The Production Approach to GDP
- Exactly counting everything once
- Excluding second-hand goods from GDP calculation.
Lecture 3 - GDP and Applications
- What are nominal and real GDP?
- How do we measure a change in real GDP over time?
- What does the quantity index for calculating real GDP represent? (Laspeyres, Paasche, or Chain Weighting)
- How do we compare economic performance across countries (relying on currency exchange rates)? How large is China's economy relative to the U.S. one?
Lecture 3 - Exercise 1 — Basic GDP Calculations
- GDP impact calculations-Scenarios
  - College tuition
  - Used car
  - Government spending on a dam.
  - Foreign graduate students teaching assistant earnings.
Lecture 3 - Exercise 2 — What Counts in GDP
- Calculating changes in GDP based on different transactions.
Lecture 3 - Exercise 3 — Capital Gains
- What constitutes capital gains and why aren't they typically incorporated into GDP.
Lecture 3 - Exercise 4 — Calculating GDP
- Example of making and selling goods.
- Calculating total GDP
Lecture 3 - Exercise 5 — Size of India's Economy
- Comparing Indian GDP to U.S. GDP.
- How important are relative prices?
Lecture 3 - Exercise 6 — Earthquakes and GDP
- How do earthquakes affect the standard of living of a country?
  - Measured GDP
- Impact on economic well-being.
Lecture 4 - Growth Basics
- Definition of Economic Growth
- Per capita GDP increase
Lecture 4 - Growth Example — Population
- Population growth example-constant growth rate (2% per year) for 100 years
Lecture 4 - Rule of 70
- Calculation of the length of time required for incomes to double with different growth rates
- Using the ratio scale to visualize these changes more effectively, graphically
Lecture 4 - Growth in practice
- Taiwan's rapid growth — doubling every 12 years.
- Economic well-being of young adults today versus their grandparents.
- Growth in poorer countries — comparing countries from Figure 3.8
Lecture 4 - Properties of Growth Rates
- Growth rates of ratios, products, and powers
- Examples
Lecture 4 - Example of growth rate calculations
- Formula for calculations
Lecture 4 - Exercises
- Calculations of growth rates
  - given different equations
Lecture 5 - Growth and Production Function
- Definition of economic models
- Example with ice cream production
Lecture 5 - Example with ice cream production and returns to scale.
- Constant returns to scale - doubling the inputs leads to doubling the outputs
Lecture 5 - Standard Replication Argument
- How can a firm in Shangri-La double its output of ice-cream?
- Replicating the firm is a way to double the input.
Lecture 5 - Marginal Product
- Marginal product of capital (MPK) and labor for ice cream production
  - As you increase the input, the output increases less rapidly.
Lecture 5 - Diminishing Marginal Production of capital
- Finding the derivative of the production function using calculus
Lecture 5 - The Model - General Equilibrium, Markets (capital & labor) and Ice Cream
- Five equations, and five unknowns. Illustrating the model dynamically
Lecture 5 - Interpretations, Understanding TFP differences
- Physical capital—machines and buildings that help produce goods.
- Human capital-skills that individuals acquire making them more productive
- Technology-New methods and technologies in production are used more in rich countries than poorer ones. (e.g., computers, pharmaceutical, and so on.)
- Institutions-governments play a role in influencing TFP. (e.g. corruption)
Lecture 5 - Evidence and Examples - U.S. and China's Production Functions (TFP)
Lecture 5 - Exercises
Lecture 6 - Solow Model
Lecture 6 - South Korea and the Philippines
- Comparison of 1960s data
- Comparison of 2017 data
Lecture 6 - The Solow Growth Model - Build on production function - endogenize capital
Lecture 6 - The Solow Model Story
- Farm analogy with corn
  - Farmers plant and tend crops, and harvest.
- They eat some of the harvest and save some to plant the next year
  - Each seed kernel produces many more kernels
Lecture 6 - The Economy of Solovia
- Production function
- Capital accumulation (Kt+1 = Kt+ It – dKt)
- Labor Force — Lt = [ ]
- Resources Constraint — Ct + It = Yt
- Allocation of resources — I = 5Yt
Lecture 6 - The Economy and Real Interest Rate
- Simplification: leaving out specific prices
- Measuring real interest rates-return (real) on saving or borrowing
- Saving equals investment
Lecture 6 - Solving the Solow Model
Lecture 6 - The Solow Diagram
Lecture 6 - The Capital-Output Ratio
Lecture 6 - Explaining capital in the Solow model
Lecture 6 - Economic Growth in the Solow Model
- In the long run, there is no growth
Lecture 6 - Growth and Transition Dynamics
Lecture 6 - Case Study - Examples, The U.S. and China
Lecture 6- Case Study - Growth Rates in the OECD
Lecture 6 - Growth Rates around the world
- How investment (measured as percentage of GDP) varies from country to country.
Lecture 6 - Investment in South Korea and The Philippines
- Comparison in relative investment rates.
Lecture 6 - What we learn from the Solow framework - Shortcomings of the frameworks.
- Capital accumulation
Lecture 6 - Questions for Review
Lecture 7 - Romer Model
Lecture 7 - Solow and Romer
- Capital versus Labor
- Objects versus Ideas
  - Raw Materials (objects) are finite
  - Ideas (instructions or recipes) are non-rivalrous
Lecture 7 - The Idea Diagram
- Idea → Nonrivalry → Increasing returns
Lecture 7 - Nonrivalry
- How can an idea be used by many people simultaneously — example of an architectural plan, method for turning oil into plastic, the genetic material (DNA)
Lecture 7 - Excludability
- The Extent to which someone can restrict the use of an idea.
Lecture 7 - Increasing Returns with Example (Asthma Inc.)
Lecture 7 - Revisit our Standard Production Function
Lecture 7 - Problems with Perfect Competition
- Examples of products with high marginal costs
Lecture 7 - How to Address Problems with Perfect Competition, Intellectual Property, Regulations
Lecture 7 - Population Growth in the Solow Model
Lecture 7 - The Romer Model: Our Corn Farm Again
- Illustrating the new ideas in the Romer Model
Lecture 7 - The Key Insight: Nonrivalry
- Output per person depends on the total stock of ideas (not just ideas per person)
Lecture 7 - Where do ideas come from?
- Model that each person produces one new idea per year
Lecture 7 - What is the long-run growth rate of A?
Lecture 7 - Growth in the Romer Model
- Growth of GDP is proportional to the growth of population
Lecture 7 - From IRS to Growth
- Objects versus Ideas — difference in how growth occurs
- Income per person depends on aggregate stock of knowledge, regardless of number of ideas per person
Lecture 7 - Example - Solow and Romer comparing models - Comparing MobiPhones in the Solow and Romer Models
Lecture 7 - World Growth Over the Very Long Run
- Graph showing population and per capita GDP growth
Lecture 7 - Combining the Solow and Romer Models - Combining models to explain world growth over time.
Lecture 7 - Questions for review

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This quiz explores key concepts in economics, particularly focusing on the Cobb-Douglas production function and its implications on labor and capital hiring. Assess your understanding of income levels relative to the U.S. and the roles of different economic models in profit maximization. Test your knowledge on international income comparisons and their trends since 1980.