In the early 1980s, India adopted a series of governmental reforms with two main goals: promoting industrial production and opening the economy to international trade. These policies led to a 300% increase in real GDP per capita in India, and over the last thirty-five years, India has ranked as one of the fastest growing economies in the world.

By comparing the economy in India from 1981 to 1985 and then from 2006 to 2010, show that changes in the economic environment from the early 1980s contributed to the overall economic growth experienced throughout India. What was India’s long-run growth rate during each of these five-year periods? Use real GDP per capita to measure growth. At the current long-run growth rate, approximately how long should it take for GDP to double in India?

STEP | 1 Compare the economy in India across time from 1981 to 1985 and then from 2006 to 2010. (Hint: the World Bank internet site data.worldbank.org provides statistics over time on real GDP per capita for various countries.)Read pages 408–410. Go to the website data.worldbank.org. Under the search box “Find an indicator” enter “GDP per capita” and select the option for “Constant 2005 US$”. At the top of the table select the years 1981–1985 and copy the numbers for India. Do the same for the years 2006–2010.

Real GDP per capita in India from the World Bank site in constant U.S. dollars (reference year 2005) is shown in the table at right.

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STEP | 2 Using the numbers in the table at right, find the growth rate in real GDP in India over the same periods, and discuss the difference in growth rates in the early 1980s with those of the late 2000s.Read the Pitfalls on page 410.

The rate of change, or growth rate, in real GDP per capita between year 1 and year 2 is calculated using the following formula:

Thus, the growth rate below between 1981 and 1982 is calculated as follows:

As you can see from the numbers in this table, India experienced modest growth from 1981 through 1985 but significant growth from 2006 through 2010.

STEP | 3 What was the average long-run growth during each five-year period? How long will it take India’s GDP to double if the economy continues to grow at the long-run average from 2006–2010?Read pages 410–411 and look closely at Equation 15-1.

Summing the above growth rates from 1981 to 1985 and dividing by 4, we find an average growth rate of 2.6%. The average growth from 2006 to 2010 is 6.6%. According to the rule of 70, if India continues to grow at an average of 6.6% it would take 70/6.6 = 10.6 years for real GDP per capita to double in India.