Chapter 25 : Production and Growth

Section A (MCQ)

1 b 2 c 3 a 4 c 5 b 6 c 7 c 8 a 9 c 10 a

Section B (Short answer questions)

Question 1

The four determinants of productivity are: (1) physical capital, which is the stock
of equipment and structures that are used to produce goods and services; (2)
human capital, which consists of the knowledge and skills that workers acquire
through education, training, and experience; (3) natural resources, which are inputs
into production that are provided by nature; and (4) technological knowledge,
which is the understanding of the best ways to produce goods and services.

Question 2

The standard of living is a measure of how well people live. Income per person is
an important dimension of the standard of living and is positively correlated with
other things such as nutrition and life expectancy that make people better off.
Productivity measures how much people can produce in an hour. As productivity
increases, people can produce more (and use less to produce the same amount) and
so their standard of living increases.

Question 3
Property rights are an important prerequisite for the price system to work in a
market economy. If an individual or company is not confident that claims over
property or over the income from property can be protected, or that contracts can
be enforced, there will be little incentive for individuals to save, invest, or start
new businesses. Likewise, there will be little incentive for foreigners to invest in
the real or financial assets of the country. The distortion of incentives will reduce
efficiency in resource allocation and will reduce saving and investment which in
turn will reduce the standard of living.