BR18A: Bridge: Economic Growth I
Question 1
Why does a small difference in economic growth result in a large difference in wealth over time?
A. Over time, small growth rates end up turning negative, preventing further growth.
B. Over time, small growth rates turn into large growth rates.
C. Governments are more likely to support big countries than small countries.
D. The effect of compounding allows growth to build upon previous growth.
Hint
Consider that small differences in growth are large in percentage terms. For example, a 3% growth rate is 50% larger than a 2% growth rate.Answer
D. The effect of compounding allows growth to build upon previous growth. The “magic” of compound growth arises from the fact that each percentage increase in a quantity is applied to an exponentially expanding base. One aspect of compound growth is that seemingly small differences in percentage growth rates result in large differences in cumulative totals. Suppose that two economies, A and B, each start with a GDP of 10 but that economy A grows at 2%, and economy B grows at 3%. Thirty years later, economy A will have a GDP of 18.1 (= 10 × [1 + 0.03]30), and economy B will have a GDP of 24.3 (= 10 × [1 + 0.02]30)—a more than 30% difference in wealth.Question 2
Suppose Hyperpolis’s GDP increases by 15%, and its inflation rate is 12%, while Superpolis’s GDP increases by 6%, and its inflation rate is 3%. Assuming the population in both countries remained constant, which economy grew faster?
A. It is not possible to determine which economy grew faster.
B. Both economies grew at the same rate.
C. Superpolis’s economy grew faster.
D. Hyperpolis’s economy grew faster.
Hint
Real GDP is $\frac{Nominal\;GDP}{Price\;level}$ The growth rate of real GDP is $\%\Delta Nominal\;GDP\;−\;\%\Delta Price\;level$.Answer
B. Both economies grew at the same rate. Real GDP is nominal GDP divided by the price level: $\frac{GDP_{nominal}}{P}$. In growth rate form, it can be expressed as$$\%\Delta GDP_{real} = \%\Delta GDP_{nominal}−\%ΔP$$ The growth rate of real GDP in Hyperpolis is thus 15% − 12% = 3%, while that in Superpolis is 6% − 3% = 3%. Both economies therefore grew at the same rate.
Question 3
Which of the following would represent the fastest annual growth of GDP per capita?
A. An increase in real GDP of 2% and population decline of 1%.
B. An increase in real GDP of 5% and population growth of 1%.
C. An increase in real GDP per capita of 3%.
D. An increase in real GDP of 6% and population growth of 4%.
Hint
Real GDP per capita is positively affected by increases in real GDP but negatively affected by population increases.Answer
B. An increase in real GDP of 5% and population growth of 1%. Real GDP per capita is the ratio of real GDP to the population: $\frac{Real\; GDP}{Population}$. In growth rate form, this can be written:$$\%\Delta GDP - \%\Delta Population = Growth\;rate\;of\;real\;GDP\;per\;capita$$ Among the options listed, the fastest annual growth of real GDP per capita is represented by a growth rate of real GDP of 5% and a population growth rate of 1%—a combination that yields a growth rate of real GDP per capita of 4%.
Question 4
If Greenville’s GDP doubled over 5 years, what was the approximate annual growth rate (using the rule of 70)?
A. 20%
B. 5%
C. 14%
D. 9%
Hint
The rule of 70: if GDP is growing at a rate of x% per period, take 70 and divide it by x to get the number of years it will take for GDP to double.Answer
C. 14% To find what percentage growth rate is needed for GDP to double, divide 70 by the number of years (i.e., 5): $\frac{70}{5} = 14$Question 5
If China’s economy maintains a 7% annual growth rate over the next 20 years, about how large will its economy be in 20 years if its current GDP is \$12 trillion?
A. \$48 trillion
B. \$29 trillion
C. \$24 trillion
D. \$36 trillion