Check Your Understanding

1. Question

   Why do economists focus on real GDP per capita as a measure of economic progress rather than on some other measure, such as nominal GDP per capita or real GDP?

   Economists want a measure of economic progress that rises with increases in the living standard of the average resident of a country. An increase in overall real GDP does not accurately reflect an increase in an average resident’s living standard because it does not account for growth in the number of residents. For example, if real GDP rises by 10% but population grows by 20%, the living standard of the average resident falls: after the change, the average resident has only (110/120) × 100 = 91.6% as much real income as before the change. Similarly, an increase in nominal GDP per capita does not accurately reflect an increase in living standards because it does not account for any change in prices. For example, a 5% increase in nominal GDP per capita generated by a 5% increase in prices results in no change in living standards. Real GDP per capita is the only measure that accounts for both changes in the population and changes in prices.

2. Question

   Apply the Rule of 70 to the data in Figure 37.3 to determine how long it will take each of the countries listed there to double its real GDP per capita. Will India’s real GDP per capita exceed that of the United States in the future if growth rates remain the same? Why or why not?

   Using the Rule of 70, the amount of time it will take China to double its real GDP per capita is (70/8.9) = 7.9 years; India, (70/4.3) = 16.3 years; Ireland, (70/3.2) = 21.9 years; the United States, (70/1.7) = 41.2 years; Argentina, (70/1.5) = 46.7 years; and France, (70/1.2) = 58.3 years. Since the Rule of 70 can be applied to only a positive growth rate, we cannot apply it to the case of Zimbabwe, which experienced negative growth. If India continues to experience a higher growth rate of real GDP per capita than the United States, then India’s real GDP per capita will eventually surpass that of the United States.

3. Question

   Although China and India currently have growth rates much higher than the U.S. growth rate, the typical Chinese or Indian household is far poorer than the typical American household. Explain why.

   The United States began growing rapidly over a century ago, but China and India have begun growing rapidly only recently. As a result, the living standard of the typical Chinese or Indian household has not yet caught up with that of the typical American household.