Question

Based on information from the World Bank, in 2016, GDP per capita was $57,467 in the United States and $59,977 in Iceland – very similar values (and high values compared to many countries). But, the annual rate of GDP growth averages 0.9% in the United States and 6.1% in Iceland.  

Would you predict the United States or Iceland to have a more rapid increase in the standard of living in the long run? _________________ Discuss what evidence/theory you are using to support this prediction.

Answer 1

In the given problem here the per capita GDP is given which is the ratio of GDP to “population”. Now, the overall standard of living depends on “per capita GDP”. So, if the “per capita GDP” will increase ,=> the increase in “standard of living. We have given that the “growth rate of GDP” is “0.9%” in US and “6.1%” in Iceland.

SO, the growth of the per capita GDP is the “growth of GDP” and the “growth of population”.

So, the standard of living of the Iceland will be more if the following condition hold.

=> growth of per capita GDP of Iceland > growth of per capita GDP of US.

=> growth of GDP of Iceland + growth of population of Iceland > growth of per capita GDP of US + growth of population of US.

=> 6.1% + growth of population of Iceland > 0.9% + growth of population of US.

=> growth of population of Iceland – growth of population of US > 0.9% - 6.1% = (-5.2)%. So, if the this condition will hold, => the “standard of living of Iceland will be more. Similarly, if the population growth difference is less than (-5.2%), => the standard living of US will increase.

So, the final answer depends on the value of the “population growth differential”.