MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 21, Problem 1DQ
To determine

To state: The reasons for non-growth of the GDP of US beyond 3 or 4 percent

Expert Solution & Answer
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Explanation of Solution

Even though the president of country U.S. has stated that his economy can sustain an average growth of 3 to 4 percent per annum, this seems to be an impossible task for the country. Some of the policies of the government such as tax cuts and infrastructure spending could boost up the economic growth for the next couple of years. But ongoing economic growth is not mere short spurt but need to continue in order to raise the standard of living. The arithmetical figures of growth for the last few decades have shown that it is unlikely that the growth of this magnitude is possible.

There exist various reasons that clearly show that a growth rate of 3 to 4 percent per annum for the economy would be an impossible task to achieve. They are as follows:

  1. Compared to how the economy has performed in the last 10 years in which its GDP has averaged for less than 1.5 percent per annum, a pickup in the economic growth would result in a dramatic shift in the nation, which under the current circumstances is not possible.
  2. The economic growth of the nation depends upon two factors mainly, the number of people working as well as the hour they punch in and the efficiency with which they produce goods or services. This would mean that boosting the GDP would require considerable increase in the growth of the labor force or their productivity or a combination of the two. These elements however are not likely to grow at a rate required to reach the required percentage of economic growth.
  3. The labor forces of the country have been rising very slowly in the last decade or so either because of less number of workers or people retiring voluntarily and more recently the ongoing retirement of Baby Boomers (people born between 1946 and 1964). Unless people start working for more years or more rapidly, increase of 3 to 4 percent in the GDP is an impossible task
  4. Productivity of the country has also been rising very slowly recently, with business sector output per hour rising at an average of 1.25 percent over the last decade.

Given the figures of GDP growth and the impossibility of large enough boost to the labor or productivity, promise of growth at 3 or 4 percent per annum indefinitely seems very implausible.

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