TEST # 2 – UNIT # 2
Theories of Economic Growth and Measures of Development
Name _________________________________________ Test Score________
Part A: Multiple-Choice Questions (20 points)
- The underlying assumption of the Harrod-Domar growth model is that
(a) the incremental capital-output ratio is given by k = Y/K.
(b) growth is mainly determined by capital accumulation.
(c) growth can be sustained only if agricultural productivity rises.
(d) developing countries save too much and invest too little.
- Which of the following is an assumption of the Lewis two-sector model?
(a) surplus labor in industry.
(b) positive marginal product of labor in agriculture.
(c) an upward sloping labor supply curve in industry.
(d) none of the above.
- The linear stages theory of economic growth fails to recognize that increased investment is
(a) both a necessary and a sufficient condition.
(b) a necessary but not a sufficient condition.
(c) a sufficient but not a necessary condition.
(d) neither a necessary nor a sufficient condition.
- The Solow residual helps explain growth that derives from
(a) increasing the size of the labor force.
(b) increasing the size of the capital stock.
(c) increasing the capital labor ratio.
(d) anything except increases in the size of the labor force or the capital stock.
- In endogenous growth models, it is assumed that
(a) there are external economies from public or private investments.
(b) there are diminishing marginal returns to capital.
(c) growth is explained by forces outside the model.
(d) the capital labor ratio is constant.
- In contrast to the earlier neoclassical models of economic growth, in endogenous growth models, there is more emphasis on
(a) human capital.
(b) externalities.
(c) increasing returns to scale.
(d) all of the above.
- The new growth theory attempts to explain
(a) the rate of population growth within a country.
(b) the rate of capital accumulation within a country.
(c) the factors that determine the size of the Solow residual.
(d) why there are diminishing returns to capital.
- The S-curve is used to illustrate
(a) the typical path taken by the current account over time.
(b) economic fluctuations in the economy.
(c) the typical growth path of a developing economy.
(d) the existence of multiple equilibria.
- The big-push theory argues that coordination failures may arise because of
(a) pecuniary externalities.
(b) technological externalities.
(c) lack of human capital.
(d) all of the above.
- The O-ring theory places emphasis on
(a) education of the labor force.
(b) skill complementarities.
(c) purchases of machinery and equipment by firms.
(d) none of the above.
Part B: Quantitative Analysis (Show all your work).
Problem # 1: “Harrod-Domar Model” (10 points)
Consider the Harrod-Domar model. Suppose that initially, an African country’s capital-output ratio (k) is 5, and the savings rate (s) is 12%.
a). What will be the initial GDP growth rate?
b). Suppose that technological advances cause the capital-output ratio to fall to 4. How will this affect the GDP growth rate?
c). Starting again from the initial situation, suppose instead that the national savings rate is increased to 15%. How will this affect the GDP growth rate?
Problem # 2: “Solow Growth Model” (10 points)
Consider again the Solow growth model and the following production function:
a). If A = 2, L = 20,000, and K = 400, what is output?
b). Suppose the labor force grows by 5% so that it is now 21,000. By how much does output increase?
c). Starting again with the conditions in part a, what is capital increases by 5%, so that it is now 420. By how much does output increase?
Problem # 3: “Basic Indicators of Development” (10 points)
Please use the PDF file entitled “Selected Statistics on African Countries 2008” under the Course Documents folder to complete the following table using Central African countries data. What have you learned?
| Country | GNI per Capita 2006 | HDI Value (Scale 0 to 1) 2005 | Primary School Enrollment (%) 2005 – 2007 | Adult Illiteracy Rate (MF) 2007 | Life Expectancy at Birth (Years) (MF) 2007 |
| Cameroon | |||||
| Central African Republic | |||||
| Chad | |||||
| Congo | |||||
| Democratic Republic of Congo | |||||
| Equatorial Guinea | |||||
| Gabon |
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