Question

Suppose a country's total output is growing 10 percent per year, but its population is growing 11 percent per year. What will happen to living standards? a. Rise. b. Fall. c. Remain the same.

Short answer

b. Fall.

Step-by-step solution

Understanding Growth Rates

To determine what happens to living standards, we need to compare the growth rates of total output and population. Living standards, often measured as output per capita, depend on how these rates compare.

Calculate Output Per Capita Growth

Output per capita is calculated by dividing total output by the population. If total output grows at 10% per year, while the population grows at 11% per year, the formula for the growth rate of output per capita is: \[ (1+GrowthRate\;of\;Output) / (1+GrowthRate\;of\;Population) - 1 \]Substituting the given growth rates: \[ Output\;Per\;Capita\;Growth = \frac{1.10}{1.11} - 1 \] This calculation results in approximately \(-0.009 \) or -0.9%.

Interpret the Output Per Capita Growth

Since the output per capita growth is negative (-0.9%), this means that living standards, or output per person, are decreasing. Therefore, even though the total output is growing, the population is growing at a faster rate, leading to a decline in living standards.

Conclusion on Living Standards

Based on the calculations, the growth in total output is not enough to outpace the growth in population, resulting in a decrease in output per capita. Therefore, living standards will fall.

Key concepts

Output per Capita

Output per capita is a crucial concept in understanding how living standards are determined. It refers to the average amount of goods and services produced per person in a country over a specific period. This measure can help us gauge the productivity and economic health of a nation. In simpler terms, think of output per capita as the average "slice of the economic pie" that each person gets. When total output or Gross Domestic Product (GDP) grows faster than the population, each person gets a larger share of the pie, indicating improved living standards. However, if the population grows faster than the GDP, as in this exercise, each person's slice becomes smaller, leading to a decrease in living standards. In this case, although the economy grows by 10 percent annually, the 11 percent population growth dilutes the benefits, resulting in a negative output per capita growth of -0.9 percent.

Population Growth

Population growth refers to the increase in the number of people in a country. This can significantly impact economic metrics like output per capita. While a growing population can contribute to a larger workforce and potentially greater productivity, it can also present challenges. When population growth exceeds economic output growth, resources are stretched thinner. More people require more goods, services, and infrastructure. If the economy does not expand rapidly enough to meet these demands, it can lead to diminished quality of life, strained resources, and decreased living standards. Thus, balanced growth is key, where both population and economic growth work hand in hand to improve the standard of living.

Economic Growth

Economic growth is the increase in the production and consumption of goods and services within an economy, reflecting an increase in the country's overall wealth. Measured often as a percentage increase in GDP, economic growth signifies a healthy, expanding economy. However, for economic growth to translate into better living standards, it needs to surpass population growth. A robust growth rate ensures more investments, job opportunities, and higher incomes, thus elevating the quality of life. In our scenario, although the economy is growing at a healthy 10 percent, the faster 11 percent growth in population counteracts these benefits. Therefore, ensuring that economic growth outpaces or keeps up with population growth is vital for improving citizens' livelihoods.

Standard of Living

Standard of living is a measure of the wealth, comfort, material goods, and necessities available to a population. It is a multifaceted concept including factors such as income, employment, class disparity, poverty rate, and housing affordability. A key indicator of the standard of living is output per capita. As seen in this exercise, if output per capita decreases, it generally means people are "getting less" in terms of goods and services per person, hinting at a reduction in living standards. This can result in higher competition for jobs, lesser income per capita, and lower quality of life. Understanding these dynamics is important for policymaking and ensures that economic decisions support sustainable improvements in living standards.