Question

Country A has 100 machines (physical capital) and a population of 100 (out which 80 are in the labour force). Discuss the effect on real GDP per capita if a. Population doubles (keeping machines constant at 100) b. Machines double (keeping the population constant at 100)

Answer 1

Given that country A is having 100 machines, 100 total population out of which 80 are labour force. Real GDP per capita is a measure used to compare standards of living between two countries. When total economic output is divided by total number of population we get real GDP per capita. It doesn't have any effect from labour force.

Our both the parts of this question can be understood by example :

Supposed our 100 machines produce 1million economic output with population of 100 and 80 labour force.

Our Real GDP per capita will be = 1 million /100(total population) = $10000.

1. If the number of population increases by 100 then real GDP per capita will decrease.

It is because we have just 100 machines only. As in this case our economic output is still same. In above example if we put

Real per capita income = 1 million /200 (total population)   = $5000 .

2. If the population is still 100 but the machines will double this may leads to increase in real GDP per capita income . As our production will increases now.

If we consider this in above example we see that

Real GDP per capita = 2 million /100. = $ 20000.

Therefore if you think about the use of labour force given then answer is there is of no use of that because the concept of real GDP per capita is considering the total population and gives idea about only average population. And GDP is wholly related to production. There may be chances that production in second part may not be exactly double but it is fixed that it will increased.