Chapter 18: Q. 18.2LO (page 397)
Understand why the existence of dead capital retards economic growth?
By increasingthe number ofworking class increase will help in producing more output.
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Assume that each billion in net capital investment generates percentage point of the average percentage rate of growth of per capita real GDP, given the nation's labor resources. Firms have been investing exactly billion in capital goods each year, so the annual average rate of growth of per capita real GDP has been percent. Now a government that fails to consistently adhere to the rule of law has come to power, and firms must pay million in bribes to gain official approval for every billion in investment in capital goods. In response, companies cut back their total investment spending to billion per year. If other things are equal and companies maintain this rate of investment, what will be the nation's new average annual rate of growth of per capita real GDP?
Take a look at Table 18-1. Based on the basic arithmetic of economic growth, what were the average annual rates of real GDP growth since 1990 for those nations experiencing negative rates of annual growth of per capita real GDP?
Over the entire interval since 2000, which group of countries has experienced a higher rate of economic growth: emerging and developing nations or advanced nations?
Suppose that a foreign resident has bought 20 percent of the shares of a company based in a developing nation but is experiencing difficulty determining whether the firm has responded to this purchase by engaging in risker behaviour. What type of investment has this foreign resident undertaken, and what type of asymmetric information problem is she or he experiencing?
Identify which of the following situations currently faced by international investors are examples of adverse selection and which are examples of moral hazard.
Among the governments of several developing countries that are attempting to issue new bonds this year, it is certain that a few will fail to collect taxes to repay the bonds when they mature. It is difficult, however, for investors considering buying government bonds to predict which governments will experience this problem.
Foreign investors are contemplating purchasing stock in a company that, unknown to them, may have failed to properly establish legal ownership over a crucial capital resource.
. Companies in a less developed nation have already issued bonds to finance the purchase of new capital goods. After receiving the funds from the bond issue, however, the company's managers pay themselves large bonuses instead.
When the government of a developing nation received a bank loan three years ago, it ultimately repaid the loan but had to reschedule its payments after officials misused the funds for unworthy projects. Now the government, which still has many of the same officials, is trying to raise funds by issuing bonds to foreign investors, who must decide whether or not to purchase them.
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