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Chapter 22: Problem 7

(Related to the Apply the Concept on page 746 ) In the 1961 edition of his best-selling introductory economics textbook, the late Nobel Laureate Paul Samuelson noted that Soviet GDP might become larger than U.S. GDP by \(1985 .\) a. In 1961 , why might a leading economist have expected that the Soviet economy might eventually become larger than the U.S. economy? b. Briefly explain why the Soviet economy failed to overtake the U.S. economy.

Short Answer

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The Soviet Union's economy appeared to be booming in the 1960s, with significant growth due to centralized planning and focus on heavy industries. However, it ultimately failed to overtake the U.S. economy due to its inability to efficiently respond to market needs, large-scale mismanagement, heavy military spending, the lack of trade, economic openness, and innovation.

Step by step solution

01

Contextual Analysis

In 1961, the Soviet Union was experiencing significant economic growth, largely due to centralized planning that focused on heavy industries and undercut consumers' needs. The focus on the industrial sector resulted in high growth rates, which could easily give the impression of an economy that was quickly catching up to the US.
02

Economic Growth Comparison

When comparing economic growth, it's essential to consider not just GDP but also GDP per capita as well as welfare and productivity - all aspects the Soviet Union's economy was lacking in comparison to the U.S. Yet, its rapid growth created the impression of a burgeoning superpower.
03

Identify the Cause of Soviet's Failure to Overtake the U.S.

The Soviet Union's failure to surpass the USA's economy was due to many factors. The centralized control could not respond efficiently to the market's needs, often leading to inefficiencies and large-scale mismanagement. Moreover, a large chunk of the economy was driven by military spending rather than productive industries. These factors, coupled with the lack of trade, economic openness, and innovation, limited overall growth.
04

Conclusion

By 1991, the USSR had collapsed, making the comparison moot. Yet, even by the mid-80s, it was clear that although the Soviet economy was large, it wasn't comparable to the diversified, dynamic, and highly productive US economy. In a sentence, although the USSR's economy was growing, it was not sustainable, nor was it catching up to the US's economy.

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Most popular questions from this chapter

(Related to Solved Problem 22.2 on page 747) Shortly before the fall of the Soviet Union, the economist Gur Ofer of Hebrew University of Jerusalem wrote, "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." Explain why this strategy turned out to be a very poor way to sustain economic growth in the long run.

In China, why may a lower birth rate lead to slower growth in real GDP per capita? Why might high levels of spending on investment in China lead to high rates of growth in the short run but not in the long run?

Deirdre McCloskey, an economist at the University of Illinois at Chicago, argued, "A poor country that adopts thoroughgoing innovation ... can get within hailing distance of the West \(\ldots\) in about two generations." a. What does McCloskey mean by a country adopting "thoroughgoing innovation"? What does she mean by a country getting within "hailing distance of the West"? b. A generation is usually considered to be about 25 years. In 2016, real GDP per capita in Italy was about \(\$ 33,500\) (measured in 2010 U.S. dollars), and real GDP per capita in Haiti was about \(\$ 1,500 .\) If Haiti adopted thoroughgoing innovation and as a result its average annual growth rate over the next 50 years increased to 6.5 percent, would Haiti end up with the level of real GDP per capita that Italy enjoyed in \(2016 ?\) [Hint: Use the following equation: Real GDP per capita \(_{2016} \times(1+g)^{50}=\) Real GDP per capita \(_{2066}\), where \(g\) is the average annual growth rate expressed as a decimal.] c. McCloskey also noted that her previous observation "does not mean that catch-up is inevitable." Briefly explain why low-income countries catching up with high-income countries isn't inevitable.

Briefly explain whether any of the following policies are likely to increase the rate of economic growth in the United States. a. Congress passes an investment tax credit, which reduces a firm's taxes if it installs new machinery and equipment. b. Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state sales taxes they pay. c. Congress provides more funds for low-interest loans to college students.

A columnist in the New York Times observed that "many analysts agree that economic reform, of which integration into the global economy was a key element, has lifted millions of people out of poverty in India." What does "integration into the global economy" mean? How might integration into the global economy reduce poverty in India?
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