Question 1

Describe how factor accumulation, technology, and efficiency are proximate determinants of a country's level of income per capita.

Accepted Answer

They directly affect income. Furthermore, by definition, these three measures are the only proximate determinants of income. Any difference in income per capita between two countries must be the result of some combination of differences in these three determinants; similarly, any growth in income per capita in a country must be the result of growth in one or more of these determinants.

Question 2

In 1930, John Marnard Keynes reviewed the history of economic growth and considered what would happen if compound growth continued at its current pace for another century. Such growth, he calculated, would raise the standard of living by a factor of between 4 and 8. What did Keynes conclude?

Accepted Answer

That with growth of this magnitude, humanity would be within sight of solving what he called the economic problem of scarcity. With another century of growth, Keynes forecast, the central problem facing an individual would shift from how to acquire enough goods and services to how to meaningfully enjoy his abundant free time.

Question 3

Despite the Great Depression, World War II, and other events that followed Keyne's writing, the fact is that compound growth did continue at roughly the rate Keynes had forecast. But with four-fifths of the time period he considered having already elapsed, how is it clear that the second part of Keynes's prediction was terribly wrong?

Accepted Answer

The boom in leisure that he forecast has failed to come about. Rather than worrying about how to spend their abundant free time, people in many of the wealthiest countries are working as hard as their predecessors did 80 years ago, apparently because they feel that doing so is necessary to attain the standard of living they desire.

Question 4

Even in the world's richest countries, the economic problem of scarcity seems no close to having been solved than during Keynes's time. Consideration of these facts raise which important question?

Accepted Answer

Is it possible that growth will not make people happier, or at least not as much happier as they expect?

Question 5

One might think that the finding that rich people within a country are happier than poor people would automatically imply that people in rich countries are on average happier than people in poor countries, similarly that average happiness in a country rises as the average level of income per capita rises. This is no necessarily the case, however. In fact, it is easy to think of scenarios under which it would not hold true. Give one.

Accepted Answer

Consider what happens, for example, if people's economic satisfaction depends not only on how much they consume but also on how their consumption relates to some benchmark that they use for comparison. That benchmark might be the consumption of other people around them, for example, other people in the country where they live. A particularly simple form of this phenomenon is if people care not about their absolute level of consumption, but rather about their rank in the hierarchy of consumption.

Question 6

If people compare their consumption to the average consumption around them, why won't growth make people any happier on average?

Accepted Answer

Because it will raise people's benchmark just as much as it raises their consumption.

Question 7

What is a similar phenomenon to keeping up with the Jones's?

Accepted Answer

A similar phenomenon can occur if what people compare their consumption to is what they are used to - that is, to their own past consumption. In this case, continual growth is required just to maintain a constant ratio of current consumption to the benchmark level.

Question 8

How could this second interpretation of people happiness over time (comparing their wealth at different points in time) explain why Keynes's forecast did not come true?

Accepted Answer

Keynes did ont grasp that people would not be satisfied with income four times as large as his own because he was putting himself in their places - that is, imagining that people 100 years in the future would apply the same benchmark as he was using. He failed to realize that after 100 years of growing consumption, people would have changed their benchmarks. They would have gotten used to a higher standard of consumption, so they would not feel as well off as he imagined they would.

Question 9

What do economists call the situation where people's expectations and comparisons change over time?

Accepted Answer

Comparison Utility. A more colorful name for the same thing is the "hedonic treadmill," which nicely captures the idea of running forward but never getting anywhere.

Question 10

Richard Easterlin, wrote a series of studies on the correlation between income and happiness. His conclusion, which came to e known as the Easterlin Paradox, was that there is no link between a country's level of income and the average happiness of its residents. From his studies, two findings emerged. What's the first?

Accepted Answer

In cross-sectional analyses, it seemed that average happiness rose with income per capita up to some income level - generally around $15'000 per capita - but that after that, the relationship was flat.

Question 11

Richard Easterlin, wrote a series of studies on the correlation between income and happiness. His conclusion, which came to e known as the Easterlin Paradox, was that there is no link between a country's level of income and the average happiness of its residents. From his studies, two findings emerged. What's the second?

Accepted Answer

Within countries over time, there did not seem to be any statistically significant relationship between the growth rate of income and the increase over time in happiness.

Question 12

What will happen to the world income distribution? After rising for 150 years, the level of world income inequality flattened out in the last few decades of the 20th century. This relative constancy of income inequality is in turn the result of two forces working in opposite directions. What's the first?

Accepted Answer

The super rapid growth of some poor countries has narrowed income inequality in the world. In this respect, no country has been more important than China, with one-fifth of the world's population.

Question 13

What will happen to the world income distribution? After rising for 150 years, the level of world income inequality flattened out in the last few decades of the 20th century. This relative constancy of income inequality is in turn the result of two forces working in opposite directions. What's the second?

Accepted Answer

The persistent failure of some poor countries to grow at all serves to increase the world's income inequality.

Question 14

How could the future look bright in terms of inequality?

Accepted Answer

If the "contagion of growth" that affected China and some other poor countries continues to spread, then the next several decades could see a similar massive reduction in world poverty and a narrowing of the world income distribution.

Question 15

For countries that are currently rich, what will the most important determinant of future economic growth be?

Accepted Answer

Technological progress. Whether technological progress speeds up, or slows down, or remains constant will have more impact on living standards 50 years hence than just about anything else. However, the determinants of technological progress are poorly understood.

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