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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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? E c o n o m i c g r o w t h m e a n s a h i g h e r s t a n d a r d o f 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. I f p o p u l a t i o n i s g r o w i n g a t 2 . 5 p e r c e n t a y e a r a n d i t i s i n s o m e o f t h e p o o r e s t n a t i o n s t h e n 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. U s i n g t h e R u l e o f 7 0 , i t w o u l d t a k e 2 8 y e a r s f o r 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? G r o w t h r a t e o f r e a l G D P = 4 p e r c e n t ( = $ 3 1 , 2 0 0 - $ 3 0 , 0 0 0 ) / $ 3 0 , 0 0 0 ) . G D P p e r c a p i t a i n y e a r 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? T h e g r o w t h r e c o r d o f t h e U n i t e d S t a t e s i s s e e n 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. L o o k i n g a t G l o b a l P e r s p e c t i v e 7 . 1 , w e c a n s e e t h a t 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),
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/17/2011 for the course BUS 720 taught by Professor Na during the Summer '11 term at McMaster University.

Page1 / 5

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online