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# Chap 7 - Introduction to Economic Growth and Instability...

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Introduction to Economic Growth and Instability ANSWERS TO END-OF-CHAPTER QUESTIONS 7-1 Why is economic growth important? Why could the difference between a 2.5 percent and a 3.0 percent annual growth rate make a great difference over several decades? Economic growth means a higher standard of living, provided population does not grow even faster. And if it does, then economic growth is even more important to maintain the current standard of living. Economic growth allows the lessening of poverty even without an outright redistribution of wealth. If population is growing at 2.5 percent a year—and it is in some of the poorest nations—then a 2.5 percent growth rate of real GDP means no change in living standards. A 3.0 percent growth rate means a gradual rise in living standards. For a wealthy nation, such as the United States, with a GDP in the neighborhood of \$10 trillion, the 0.5 percentage point difference between 2.5 and 3.0 percent amounts to \$50 billion a year, or more than \$150 per person per year. Using the “Rule of 70,” it would take 28 years for output to double with a 2.5 percent growth rate, and just over 23 years with 3.0 percent growth. 7-2 ( Key Question ) Suppose an economy’s real GDP is \$30,000 in year 1 and \$31,200 in year 2. What is the growth rate of its real GDP? Assume that population was 100 in year 1 and 102 in year 2. What is the growth rate of GDP per capita? Growth rate of real GDP = 4 percent (= \$31,200 - \$30,000)/\$30,000). GDP per capita in year 1 = \$300 (= \$30,000/100). GDP per capita in year 2 = \$305.88 (= \$31,200/102). Growth rate of GDP per capita is 1.96 percent = (\$305.88 - \$300)/300). 7-3 Briefly describe the growth record of the United States. Compare the rates of growth in real GDP and real GDP per capita, explaining any differences. Compare the average growth rates of Japan and the U.S. between 1997 and 2005. To what extent might growth rates understate or overstate economic well-being? The growth record of the United States is seen in Table 7.1, shows that real GDP grew from \$1773.3 billion in 1950 to \$11,135 billion in 2005 (9.6% per year), while per capita GDP (in 2000 constant dollars) grew from \$11,666 in 1950 to \$37,491 in 2005 (4% per year). It is evident that real GDP grows more rapidly than real GDP per capita because the population is growing at the same time that GDP is growing. Since GDP per capita is GDP/population, this will show a smaller rate of growth than GDP if the denominator, population, is expanding. Looking at Global Perspective 7.1, we can see that the average annual growth rates of real GDP have been more rapid in the U.S., averaging 3.3 percent in the 1997-2005 period. Meanwhile, Japan’s growth has been sluggish (and negative for three of the years during the period), following years of growth nearly double that of the U.S. The real GDP and per capita real GDP figures may understate economic well-being to the extent they do not fully take into account improvements in product quality; and they take no account at all of the very considerable increase in leisure since 1950. On the other hand, the measures of growth also leave out increases in pollution and the possible increase in stress caused by growth, and also do not measure the extent of inequality in distribution.

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Chap 7 - Introduction to Economic Growth and Instability...

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