ANSWERS TO END-OF-CHAPTER PROBLEMS
CHAPTER 1
Quick Check
a. False. Output growth was negative for advanced economies, zero for the world, and low but not
negative for emerging and developing economies (see http://www.imf.org/external/datamapper/
NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD).
b. True. After the 2009 recession the GDP growth recovered, but it did so, on average, at a lower
level than the previous period.
2006 2007 2008 2009 2010 2011 2012 2013 2014
AE 3 2,7 0,1 -3,4 3,1 1,7 1,2 1,3 2,1
EDE 8 8,5 5,8 2,8 7,4 6,4 5,4 5,1 4,7
W 5,5 5,6 3 -0,1 5,4 4,3 3,5 3,5 3,6
AE: advanced economies
EDE: emerging and developing economies
W: world
Source: http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/
WEOWORLD
c. True/Uncertain. Most stock markets recovered to their pre-recession levels but have retreated
again since June 2016.
d. False. The unemployment rate in the United Kingdom has been low but not lower than the rates
of some other European countries like Norway, Austria, and Germany since 2010.
e. False. There are problems with the statistics, but the consensus is that growth in China has been
high.
f. False. European unemployment rates have been higher for several decades.
g. True.
h. It is true, but you have to compare using PPP to understand the real differences.
i. True. It is also the case in Europe and Japan.
2. a. More flexible labor market institutions may lead to lower unemployment, but there are questions
about how precisely to restructure these institutions. The United Kingdom has restructured its
labor market institutions to resemble more closely U.S. institutions and now has a lower
unemployment rate than before the restructuring. On the other hand, Denmark and the
Netherlands have relatively low unemployment rates while maintaining relatively generous social
insurance programs for workers.
b. Although the Euro removed an obstacle (switching currencies to make transactions) to free trade
between European countries, each country is forced to give up its own monetary policy.
Dig Deeper
3. a. This calculation is complicated by the fact that the data in China start in 2017 and the data in the
United States start in 2018. Your spreadsheet needs to take that into account. The formula your
spreadsheet will solve is:
111
© 2021 Pearson Education Ltd.
, 20.5(1.022)t =13.5(1.079)t+1
(20.5/13.5) = (1.07)( t+1)/ (1.022)t
ln(20.5/13.5)/[ln(1.07)( t+1)/ (1.022)t ]
0.417 = (t+1)(.076) – t(.021)
t ≈ 6.21 years
Since China’s output started in 2017 and the US output starts in 2018, in roughly 6 years after
2018, the two outputs are equal. That would be 2023. Thus in 2024, total output in China is
larger than in the United States.
The spreadsheet that confirms this answer is:
Year U.S. Output China Output
2017 13.50
2018 20.50 14.57
2019 20.95 15.82
2020 21.41 17.18
2021 21.88 18.66
2022 22.36 20.26
2023 22.86 22.00
2024 23.36 23.90
2025 23.87 25.95
2026 24.40 28.18
2027 24.94 30.61
2028 25.48 33.24
b. No. At current growth rates, total Chinese output will exceed U.S. output in 2024, but Chinese
output per person (the Chinese standard of living) will still be less than U.S. output per person.
c. China has increased the amount of capital per person. This is possible in the United States. China
has imported a lot of technology from the United States and other countries. This is more difficult
to do in the United States since the number of technologies available for the United States to
import that they do not already have is relatively smaller.
d. China does provide a model for other developing countries. Raising output per person by
increasing capital per person and by importing technology is a sensible development strategy.
4. a. When the value of the level of output per hour increases from 100 in 2009 to 103.2 in 2010, the
percentage rate of growth in 2010 is ((103.2-100)/100) x 100 = 3.2%. This means for the same
112
© 2021 Pearson Education Ltd.
, hour of work, output per person rose by 3.2% in 2010. We call this increase the rate of (labor)
productivity growth.
b. The decade average growth rates of productivity are: 1970-79, 2.1%; 1980-89, 1.6%; 1990-99,
2.1%; 2000-2009, 2.6%; 2010-2017, 1.0%. Productivity growth averages from 2010 to 2017 is
lower than any other recent 10-year period. The last decade with productivity growth less than 2
percent per year was the 1980s.
c. This answer will vary with the issue of the Economic Report of the President used.
Explore Further
5. a/c. As of February 2019, there had been 6 occasions since 1960, quarter 2, with two consecutive
quarters of negative economic growth. There are many quarters of negative economic growth.
Seasonally adjusted annual percentage growth rates of GDP where two or more quarters in a row
have negative growth are given below.
1969:4 -1.9 1981:4 -4.9
1970:1 -0.6 1982:1 -6.4
1974:3 -3.8 1990:4 -3.5
1974:4 -1.6 1991:1 -1.9
1975:1 -4.8
2008:3 -3.7
1980:2 -7.9 2008:4 -8.9
1980:3 -0.7 2009:1 -6.7
2009:2 -0.7
The recession in 2008-09 had the largest fall in output (2008:4) and lasted 4 quarters. Other
recessions lasted 2 or 3 quarters. The next largest quarterly fall in output was 1980:2.
6. a-b. Behavior of the unemployment rate over the 6 recessions above :
Recession Unemployment Unemployment Change over Unemployment Change from
(year and Rate in month rate in month recession rate peak after before
quarter) prior to at end of recession recession to
recession recession peak month
quarter quarter
1969:4-1970:1 3.5 4.4 0.9 6.1 (Dec. 1970) 2.6
1974:3-1975:1 5.4 8.6 3.2 9.0 (May 1975) 3.6
1980:2-1980:3 6.3 7.5 1.2 7.5 (Sept. 1980) 1.2
1981:4-1982:1 7.6 9.0 1.4 10.8 (Dec. 1982 3.2
1990:4-1991:1 5.9 6.8 0.9 7.8 (June 1992) 1.9
2008:3-2009:2 5.6 9.5 3.9 10.0 (Oct. 2009) 4.4
a. The answers are in the table above.
113
© 2021 Pearson Education Ltd.
, b. The recession from 2008:3 to 2009:2 resulted in an increase in unemployment of 4.4 percentage
points. This is the largest increase.
7. a/b. Answers could vary with the data found. In the early part of 2019, the unemployment rate in
the United Kingdom was lower than that in the European Union. The peak unemployment rate in
the European Union in April 2013 was 11% and this fell as of the time of writing to around 6.7%.
In Spain the peak unemployment rate in April 2013 was 26.3% and it falls to 14.7% in November
2017. Thus, the unemployment rate in Spain fell much more quickly than in the rest of Europe.
114
© 2021 Pearson Education Ltd.
CHAPTER 1
Quick Check
a. False. Output growth was negative for advanced economies, zero for the world, and low but not
negative for emerging and developing economies (see http://www.imf.org/external/datamapper/
NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD).
b. True. After the 2009 recession the GDP growth recovered, but it did so, on average, at a lower
level than the previous period.
2006 2007 2008 2009 2010 2011 2012 2013 2014
AE 3 2,7 0,1 -3,4 3,1 1,7 1,2 1,3 2,1
EDE 8 8,5 5,8 2,8 7,4 6,4 5,4 5,1 4,7
W 5,5 5,6 3 -0,1 5,4 4,3 3,5 3,5 3,6
AE: advanced economies
EDE: emerging and developing economies
W: world
Source: http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/
WEOWORLD
c. True/Uncertain. Most stock markets recovered to their pre-recession levels but have retreated
again since June 2016.
d. False. The unemployment rate in the United Kingdom has been low but not lower than the rates
of some other European countries like Norway, Austria, and Germany since 2010.
e. False. There are problems with the statistics, but the consensus is that growth in China has been
high.
f. False. European unemployment rates have been higher for several decades.
g. True.
h. It is true, but you have to compare using PPP to understand the real differences.
i. True. It is also the case in Europe and Japan.
2. a. More flexible labor market institutions may lead to lower unemployment, but there are questions
about how precisely to restructure these institutions. The United Kingdom has restructured its
labor market institutions to resemble more closely U.S. institutions and now has a lower
unemployment rate than before the restructuring. On the other hand, Denmark and the
Netherlands have relatively low unemployment rates while maintaining relatively generous social
insurance programs for workers.
b. Although the Euro removed an obstacle (switching currencies to make transactions) to free trade
between European countries, each country is forced to give up its own monetary policy.
Dig Deeper
3. a. This calculation is complicated by the fact that the data in China start in 2017 and the data in the
United States start in 2018. Your spreadsheet needs to take that into account. The formula your
spreadsheet will solve is:
111
© 2021 Pearson Education Ltd.
, 20.5(1.022)t =13.5(1.079)t+1
(20.5/13.5) = (1.07)( t+1)/ (1.022)t
ln(20.5/13.5)/[ln(1.07)( t+1)/ (1.022)t ]
0.417 = (t+1)(.076) – t(.021)
t ≈ 6.21 years
Since China’s output started in 2017 and the US output starts in 2018, in roughly 6 years after
2018, the two outputs are equal. That would be 2023. Thus in 2024, total output in China is
larger than in the United States.
The spreadsheet that confirms this answer is:
Year U.S. Output China Output
2017 13.50
2018 20.50 14.57
2019 20.95 15.82
2020 21.41 17.18
2021 21.88 18.66
2022 22.36 20.26
2023 22.86 22.00
2024 23.36 23.90
2025 23.87 25.95
2026 24.40 28.18
2027 24.94 30.61
2028 25.48 33.24
b. No. At current growth rates, total Chinese output will exceed U.S. output in 2024, but Chinese
output per person (the Chinese standard of living) will still be less than U.S. output per person.
c. China has increased the amount of capital per person. This is possible in the United States. China
has imported a lot of technology from the United States and other countries. This is more difficult
to do in the United States since the number of technologies available for the United States to
import that they do not already have is relatively smaller.
d. China does provide a model for other developing countries. Raising output per person by
increasing capital per person and by importing technology is a sensible development strategy.
4. a. When the value of the level of output per hour increases from 100 in 2009 to 103.2 in 2010, the
percentage rate of growth in 2010 is ((103.2-100)/100) x 100 = 3.2%. This means for the same
112
© 2021 Pearson Education Ltd.
, hour of work, output per person rose by 3.2% in 2010. We call this increase the rate of (labor)
productivity growth.
b. The decade average growth rates of productivity are: 1970-79, 2.1%; 1980-89, 1.6%; 1990-99,
2.1%; 2000-2009, 2.6%; 2010-2017, 1.0%. Productivity growth averages from 2010 to 2017 is
lower than any other recent 10-year period. The last decade with productivity growth less than 2
percent per year was the 1980s.
c. This answer will vary with the issue of the Economic Report of the President used.
Explore Further
5. a/c. As of February 2019, there had been 6 occasions since 1960, quarter 2, with two consecutive
quarters of negative economic growth. There are many quarters of negative economic growth.
Seasonally adjusted annual percentage growth rates of GDP where two or more quarters in a row
have negative growth are given below.
1969:4 -1.9 1981:4 -4.9
1970:1 -0.6 1982:1 -6.4
1974:3 -3.8 1990:4 -3.5
1974:4 -1.6 1991:1 -1.9
1975:1 -4.8
2008:3 -3.7
1980:2 -7.9 2008:4 -8.9
1980:3 -0.7 2009:1 -6.7
2009:2 -0.7
The recession in 2008-09 had the largest fall in output (2008:4) and lasted 4 quarters. Other
recessions lasted 2 or 3 quarters. The next largest quarterly fall in output was 1980:2.
6. a-b. Behavior of the unemployment rate over the 6 recessions above :
Recession Unemployment Unemployment Change over Unemployment Change from
(year and Rate in month rate in month recession rate peak after before
quarter) prior to at end of recession recession to
recession recession peak month
quarter quarter
1969:4-1970:1 3.5 4.4 0.9 6.1 (Dec. 1970) 2.6
1974:3-1975:1 5.4 8.6 3.2 9.0 (May 1975) 3.6
1980:2-1980:3 6.3 7.5 1.2 7.5 (Sept. 1980) 1.2
1981:4-1982:1 7.6 9.0 1.4 10.8 (Dec. 1982 3.2
1990:4-1991:1 5.9 6.8 0.9 7.8 (June 1992) 1.9
2008:3-2009:2 5.6 9.5 3.9 10.0 (Oct. 2009) 4.4
a. The answers are in the table above.
113
© 2021 Pearson Education Ltd.
, b. The recession from 2008:3 to 2009:2 resulted in an increase in unemployment of 4.4 percentage
points. This is the largest increase.
7. a/b. Answers could vary with the data found. In the early part of 2019, the unemployment rate in
the United Kingdom was lower than that in the European Union. The peak unemployment rate in
the European Union in April 2013 was 11% and this fell as of the time of writing to around 6.7%.
In Spain the peak unemployment rate in April 2013 was 26.3% and it falls to 14.7% in November
2017. Thus, the unemployment rate in Spain fell much more quickly than in the rest of Europe.
114
© 2021 Pearson Education Ltd.
