Question

While gross domestic product growth is picking up a bit in emerging market economies, it is picking up even more in the advanced economies. Real GDP in the emerging market economies is forecasted to grow at \(5.4 \%\) in 2015 up from \(4.9 \%\) in \(2012 .\) In the advanced economies, real GDP is expected to grow at \(2.3 \%\) in 2015 up from \(1.4 \%\) in \(2012 .\) The difference in growth rates means that the large spread between emerging market economies and advanced economies of the past 40 years will continue for many more years. Do growth rates over the past few decades indicate that gaps in real GDP per person around the world are shrinking, growing, or staying the same? Explain.

Short answer

Gaps in real GDP per person are shrinking as emerging markets continue to grow at a higher rate than advanced economies.

Step-by-step solution

Understand Growth Rates

Begin by understanding what the growth rates mean. The growth rate is the rate at which a country’s Real GDP increases over a particular period. A higher growth rate indicates a faster increase in GDP.

Calculate Growth Difference

Calculate the difference in growth rates between the years 2012 and 2015 for both emerging market economies and advanced economies. \[\text{Difference for Emerging Markets} = 5.4\text{\text{ % }} - 4.9\text{\text{ % }} = 0.5\text{\text{ % }}\]\[\text{Difference for Advanced Economies} = 2.3\text{\text{ % }} - 1.4\text{\text{ % }} = 0.9\text{\text{ % }}\]

Analyze the Trends

Observe the trends in growth rates between emerging market economies and advanced economies. Despite the increase in growth rates in advanced economies, emerging markets still have a higher growth rate (5.4% compared to 2.3%). This means the gap in growth rates remains significant.

Consider Historical Context

Recall that over the past 40 years, emerging markets have generally had higher growth rates compared to advanced economies. Even with an increase in the growth rate of advanced economies, the higher consistent growth rate in emerging markets over decades means the gap in Real GDP per person is still notable.

Conclude

Conclude whether the gaps in real GDP per person around the world are shrinking, growing, or staying the same. Since emerging markets continue to grow at a higher rate, the gap in GDP per person is shrinking.

Key concepts

Real GDP growth

Real GDP growth refers to the rate at which a country's Gross Domestic Product (GDP) increases over time, after adjusting for inflation. This is a key indicator of economic health.
When the Real GDP grows, it means that the economy is expanding, and there is an increase in the production of goods and services.
For a better understanding:

• Nominal GDP includes current prices and inflation.
• Real GDP adjusts for inflation, providing a more accurate picture of economic activity.

A country with a higher Real GDP growth rate is generally considered to be in good economic health and often experiences improvements in living standards.

Emerging Market Economies

Emerging Market Economies (EMEs) are countries that are in the process of rapid economic growth and industrialization. These economies often feature higher Real GDP growth rates compared to more mature economies.
Characteristics of EMEs include:

• Increasing GDP levels.
• Significant industrial growth.
• Higher rates of urbanization.
• Rapid improvements in infrastructure.

Countries like China, India, and Brazil are classic examples of EMEs. Over time, these economies might reduce the GDP gap with Advanced Economies due to their higher growth rates.

Advanced Economies

Advanced Economies, also known as developed economies, are characterized by higher levels of GDP per person and advanced technological infrastructure.
Unlike EMEs, the growth rates in these economies tend to be lower but stable. Reasons for this include:

• Already high levels of industrialization.
• Well-developed infrastructure.
• High per capita income.
• Stable political environments.

Examples of Advanced Economies include the United States, Germany, and Japan. These economies focus on maintaining stability and incremental growth rather than rapid expansion.

GDP per person

GDP per person, also known as GDP per capita, is a measure of the average economic output per person, calculated by dividing the total GDP by the population.
It gives an insight into the standard of living and economic well-being of the citizens in a country.
Factors influencing GDP per person include:

• Employment rates.
• Productivity levels.
• Economic policies.

Higher GDP per person usually means a higher standard of living. When comparing Real GDP per person between emerging and advanced economies, it's evident that while emerging markets may have higher growth rates, Advanced Economies still tend to have higher GDP per person. This gap, however, can shrink over long periods as emerging economies grow rapidly.