Suppose that real GDP grows at 3 percent per year. What is the growth rate of real GDP per person if the population grows at:
a. 2 percent? What happens to the standard of living?
b. 3 percent? What happens to the standard of living?
c. 4 percent? What happens to the standard of living?
a. The growth rate of real GDP per person equals the growth rate of real GDP minus the population growth rate. Hence the growth rate of real GDP per person equals 3 percent minus 2 percent or 1 percent. The standard of living increases because real GDP per person increases.
b. The growth rate of real GDP per person equals 3 percent minus 3 percent or 0 percent. The standard of living does not change because real GDP per person does not change.
c. The growth rate of real GDP per person equals 3 percent minus 4 percent or -1 percent. The standard of living decreases because real GDP per person decreases.
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