Figure 11.1 in the textbook shows that the world’s average annual growth rate of

Question

Figure 11.1 in the textbook shows that the world’s average annual growth rate of real GDP per capita in the period 1800 to 1900 was 1.3 percent and equaled 2.3 percent from 1900 to 2000. The Bureau of Economic Analysis has estimated that the real gross domestic product (in 2009 prices) of the United States in 1900 was $1,055.6 billion. The table below shows what real GDP would be for 1930 assuming that the growth rate of real GDP was 1.3 percent, 2.3 percent, and 3.3 percent from 1900 to 1930. The estimated values for 1930 were obtained by multiplying $1,055.6 billion by 1.013, 1.023 and 1.033, respectively.

Estimated Real GDP for the United States for Various Growth Rates

1.3%

2.3%

3.3%

1930

1.0693 trillion

1.0799 trillion

1.0904 trillion

The differences in estimated real GDP for 1930 seem small, but how different would GDP be if these growth rates continued through 2012? Estimate real GDP for the United States if the economy grew from 1930 to 2012 at three different growth rates: (a) 1.3 percent annually, (b) 2.3 percent annually, and (c) 3.3 percent annually.

Source: U.S. Bureau of Economic Analysis. http://www.bea.gov/

Estimated Real GDP for the United States for Various Growth Rates

1.3%

2.3%

3.3%

1930

1.0693 trillion

1.0799 trillion

1.0904 trillion

Explanation / Answer

Estimated Real GDP = GDP at 1930 * (1 + r/100)^n

at r = 1.3 at r = 2.3 at r = 3.3 GDP at 1930 1.0693 1.0799 1.0904 n i.e. from 1930 to 2012 82 82 82 annual r 1.3 2.3 3.3 Estimated real GDP 3.0837 6.9692 15.6247

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