Question

Question

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?

Answer Fully.

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?

Answer each party of the question fully.

Answer 1

Ans 1. An economy is characterized by its growth and that growth is often the growth of its economy. Although there are many other indicators of growth, economic growth is the most generally used. The rate of growth of the economy categorizes whether a country is developed or developing or underdeveloped.

A difference of 0.5 percentage in annual growth rate can lead to a massive difference in several decades. The simple maths behind this is the compounding of growth. Let us take  10 years or 1 decade into consideration.

If country A grows at 2.5 percent per annum, its growth after 10 years is :

Now If the country B grows at 3 percent per annum, its growth after 10 years is :

As we can see there is a massive difference in the resulting numbers and hence in the economy after several decades.

Ans 2. Growth rate of real GDP

Therefore Growth rate of real GDP = 0.04 or 4%

in year 1 GDP per capita

in year 2 GDP per capita

Therefore GDP growth rate per capita

Therefore, GDP growth rate = 0.0196 or 1.96%