Question

Suppose that work hours in New Zombie are 200 in year 1, and productivity is \(8 per hour worked. What is New Zombie’s real GDP? If work hours increase to 210 in year 2 and productivity rises to \)10 per hour, what is New Zombie’s rate of economic growth?

Short answer

• New Zombie’s real GDP will be $1600.
• New Zombie’s rate of economic growth is 31.25 percent.

Step-by-step solution

Step 1. Calculate New Zombie’s real GDP

The real GDP of an economy can be calculated by multiplying the hours of work (labor input) with the labor productivity (average output per hour). The value of work hours is 200, and the value of labor productivity is $8.

$$\begin{gathered} RealGDP=\left(Laborinputs\right)\times \left(Laborproductivity\right) \\ =200\times \$8 \\ =\$2100 \end{gathered}$$

New Zombie’s real GDP is $1600.

Step 2. Calculate the rate of economic growth

In the second year (current year), New Zombie's work hours (labor inputs) increased to 210, and productivity rose to $10. The new real GDP of the economy is:

$$\begin{gathered} RealGDP=\left(Laborinputs\right)\times \left(Laborproductivity\right) \\ =210\times \$10 \\ =\$2100 \end{gathered}$$

The real GDP increased by $500 ($2100 -$1600) in the second year. The economic growth rate can be calculated by dividing the growth in real GDP with the real GDP in the first year and multiplying it by 100.

$$\begin{gathered} Economicgrowth=\frac{\left(\$2100-\$1600\right)}{\$1600}\times 100 \\ =\frac{\$500}{\$1600}\times 100 \\ =31.25percent \end{gathered}$$

New Zombie’s rate of economic growth is 31.25 percent.