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Calculating Real GDP per Capita
hard

If a country's nominal GDP increased by 5% while its population grew by 2%, what would be the effect on its real GDP per capita assuming the inflation rate is negligible?

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Choose the Best Answer

A

Increased by approximately 3%

B

Decreased by approximately 3%

C

Remained the same

D

Increased by approximately 5%

Understanding the Answer

Let's break down why this is correct

Answer

When we talk about a country's nominal GDP, we mean the total value of all goods and services produced without adjusting for inflation. If the nominal GDP increases by 5%, it means the economy is producing more value than before. However, if the population grows by 2%, we need to see how this affects the average wealth of each person, known as real GDP per capita. To calculate this, we first assume that the increase in nominal GDP is mainly due to more goods and services being produced rather than inflation. If we take the 5% increase in GDP and divide it by the 2% increase in population, we find that real GDP per capita is actually growing.

Detailed Explanation

When the economy grows faster than the population, each person can have more money. Other options are incorrect because This answer suggests that growth in GDP isn't enough to keep up with population growth; This choice implies that changes in GDP and population balance each other out.

Key Concepts

Nominal GDP
Population Growth
Economic Policy.
Topic

Calculating Real GDP per Capita

Difficulty

hard level question

Cognitive Level

understand

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