Q2. Consider a nation in which the v... [FREE SOLUTION]

Chapter 6: Q2. (page 128)

Consider a nation in which the volume of goods and services is growing by 5 percent per year. What is the likely impact of this high rate of growth on the power and influence of its government relative to other countries experiencing slower rates of growth? How will this 5 percent growth rate likely affect the nation鈥檚 living standards? Will the standard of living grow by 5 percent per year, given population growth? Why or why not?

Short Answer

Expert verified

The power and influence of the country's government with a higher rate of growth would be greater relative to the countries experiencing a slower rate of growth.

The standard of living would increase with a 5 percent growth rate.

No, it will not grow by 5 percent per year.

No, the standard of living will grow more than 5 percent per year, given the population growth. This is so because the speed of economic growth is more than the population growth.

Step by step solution

Growth rate and its impact on government

Growth rates help in lowering the unemployment rate and inflation. Thus, a higher growth rate will spread more prosperity to the country and the government will gain more popularity and support from its citizens. For instance, the growth rate of India is higher than that of Pakistan. Therefore, the government in India is more influential and powerful relative to the government of Pakistan.

Hence, the nation with 5 percent growth will experience a more powerful and influential government relative to other countries with slower growth rates.

Growth rate and standard of living.

Any increase in the growth rate increases the standard of living of the citizens of that country. In other words, output per person increase with an increase in modern economic growth. Thus, the standard of living will rise for the country which is growing with a growth rate of 5 percent per year.

Under modern economic growth, the output per person grows faster than the population due to the productivity factor. Technological progress results in a higher number of effective labor which results in greater growth. It is evident from the growth rates of different countries that the modern growth rate has increased the amount per person multiple times which is more rapid than the population growth. Hence, the standard of living increases more than the growth rate.

Therefore, the standard of living will grow more than 5 percent per year, given the population growth.