Macroeconomics: Private and Public Choice
Macroeconomics: Private and Public Choice
15th Edition
ISBN: 9781305176799
Author: Gwartney
Publisher: Cengage
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Chapter 16, Problem 1CQ
To determine

Describe the economic growth that influence the living standard of people.

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Explanation of Solution

According to the economist Robert Lucas, to achieve the growth of real income, the growth of real output is essential. Hence, without achieving the growth of real output, the household would not achieve higher income and standards of living.

Suppose the growth of the economy increases, it would lead to an increase in the production possibilities such as efficiency in technological progress, significant allocation of goods and services, and the improvement in efficient and sufficient labor and capital. Due to an increase in the production possibilities, the economy will achieve a higher per capita real GDP. A higher per capita GDP implies that the per capita income of the individual becomes high. Hence, with high income, the households improve their standard of living.

According to the rule of 70, if the economic growth is 2 percent, it will take 35 years (702) to increase the income level. If the economic growth is 4 percent, it will take 17.5 years (704) to increase the income level. Therefore, if the economic growth increases from 2 percent to 4 percent, it will take less number of years to double the income. Therefore, it makes much difference when an economy grows at 2 percent or 4 percent annually.

Economics Concept Introduction

Rule of 70: The rule of 70 explains how long it will take for a variable to double in size.

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