Question

Use the following table to work out in which year the U.S. standard of living (i) increases and (ii) decreases. Explain your answer. $$\begin{array}{lcc} \text { Year } & \text { Real GDP } & \text { Population } \\ \hline 2006 & \$ 13.0 \text { trillion } & 300 \text { million } \\ 2007 & \$ 13.2 \text { trillion } & 302 \text { million } \\ 2008 & \$ 13.2 \text { trillion } & 304 \text { million } \\ 2009 & \$ 12.8 \text { trillion } & 307 \text { million } \end{array}$$

Short answer

The U.S. standard of living increases in 2007 and decreases in 2009.

Step-by-step solution

Understand the problem

To determine in which year the U.S. standard of living increases or decreases, calculate the Real GDP per capita for each year.

Calculate Real GDP per capita for 2006

Real GDP per capita is calculated as follows: Real GDP per capita in 2006 = \( \frac{13.0 \text{ trillion dollars}}{300 \text{ million people}} \) = \( \frac{13.0 \times 10^{12}}{300 \times 10^6} \) = \( \frac{13.0}{300} \times 10^6 \) dollars = 43,333.33 dollars per person

Calculate Real GDP per capita for 2007

Real GDP per capita in 2007 = \( \frac{13.2 \text{ trillion dollars}}{302 \text{ million people}} \) = \( \frac{13.2 \times 10^{12}}{302 \times 10^6} \) = \( \frac{13.2}{302} \times 10^6 \) dollars = 43,708.61 dollars per person

Calculate Real GDP per capita for 2008

Real GDP per capita in 2008 = \( \frac{13.2 \text{ trillion dollars}}{304 \text{ million people}} \) = \( \frac{13.2 \times 10^{12}}{304 \times 10^6} \) = \( \frac{13.2}{304} \times 10^6 \) dollars = 43,421.05 dollars per person

Calculate Real GDP per capita for 2009

Real GDP per capita in 2009 = \( \frac{12.8 \text{ trillion dollars}}{307 \text{ million people}} \) = \( \frac{12.8 \times 10^{12}}{307 \times 10^6} \) = \( \frac{12.8}{307} \times 10^6 \) dollars = 41,689.25 dollars per person

Compare Real GDP per capita for all years

Now compare the Real GDP per capita values calculated for each year: - 2006: 43,333.33 dollars per person - 2007: 43,708.61 dollars per person - 2008: 43,421.05 dollars per person - 2009: 41,689.25 dollars per person The standard of living increases in 2007 (compared to 2006), remains nearly the same in 2008 (slightly decreases from 2007), and decreases significantly in 2009.

Key concepts

Real GDP

Real GDP stands for Real Gross Domestic Product. It's a measure of the value of all goods and services produced by an economy over a specific period, adjusted for inflation. This adjustment helps provide a more accurate economic assessment by considering constant prices rather than nominal prices. By “constant prices,” we mean prices that strip out the effect of inflation, making it possible to compare various years' data meaningfully.
One of the main benefits of Real GDP is that it allows us to compare the economic performance of different time periods. For example, comparing the Real GDP of 2006 with that of 2009 shows a decrease from \(13.0 trillion to \)12.8 trillion. This nominal decrease reflects whether the country's actual economic output has increased or decreased, without the distortions of inflation.

Per capita income

Per capita income is a statistical measure derived by dividing the total income or Total GDP of a nation by its population. It's a crucial indicator that provides insights into the average economic well-being of individuals in that country.
For example, Real GDP per capita for the U.S. in 2006 was calculated as follows:
\[\text{Real GDP per capita in 2006} = \frac{13.0 \text{ trillion dollars}}{300 \text{ million people}} = 43,333.33 \text{ dollars per person} \]
Similarly, calculations for other years show variations:
- 2007: 43,708.61 dollars per person
- 2008: 43,421.05 dollars per person
- 2009: 41,689.25 dollars per person
These figures illustrate how per capita income changes with shifts in both GDP and population.

Standard of living

Standard of living refers to the level of wealth, comfort, material goods, and necessities available to a particular socioeconomic class or geographic area. It is often gauged by the Real GDP per capita. Higher Real GDP per capita usually indicates a higher standard of living, as it suggests that, on average, people have more financial resources.
Based on the Real GDP per capita calculations:
- Standard of living increased from 2006 to 2007 (43,333.33 to 43,708.61 dollars).
- Slightly decreased from 2007 to 2008 (43,708.61 to 43,421.05 dollars).
- Significantly decreased in 2009 (to 41,689.25 dollars).
These trends show how closely the standard of living is tied to per capita income and GDP.

Economic growth analysis

Economic growth analysis involves evaluating the changes in economic indicators like Real GDP and Real GDP per capita over time. It's fundamental for understanding how an economy is performing and where it might be heading.
In this exercise, analyzing the Real GDP and per capita values between 2006 and 2009, we see a clear trend:
- Real GDP was highest in 2007 and lowest in 2009.
- The population gradually increased each year, affecting the Real GDP per capita.
This downward trend from 2007 to 2009 indicates possible economic challenges. Factors that could contribute to such a decline include economic recession, declines in productivity, or significant financial crises. Evaluating these changes helps economists, policymakers, and stakeholders make informed decisions to attempt to bolster economic performance.