What is the possible per capita real GDP growth rate of an economy, if growth rate of population is 2% per annum, Capital output ratio (COR) is 5, Investment level of GDP is 25%?

Question

Accepted Answer

The correct option is 2:

This question relates to the Harrod-Domar growth model, which provides a basic framework for understanding economic growth. The model states that the warranted rate of economic growth (g) is determined by the rate of savings (s, or investment level of GDP) and the Capital-Output Ratio (COR or c). The formula for the total real GDP growth rate is: **Total GDP Growth Rate (g) = Investment Level of GDP (s) / Capital-Output Ratio (c)**.

First, we calculate the total real GDP growth rate:  * Investment Level of GDP (s) = 25% or 0.25
  * Capital-Output Ratio (c) = 5
  * Total GDP Growth Rate = 0.25 / 5 = 0.05 or 5% per annum.The question asks for the **per capita real GDP growth rate**. This is calculated by subtracting the population growth rate ($p$) from the total GDP growth rate ($g$): **Per Capita Real GDP Growth Rate = Total GDP Growth Rate - Population Growth Rate**.  * Population Growth Rate ($p$) = 2% or 0.02
  * Per Capita Real GDP Growth Rate = 0.05 - 0.02 = 0.03 or 3% per annum.Therefore, the possible per capita real GDP growth rate for the economy is 3.00%.

The incorrect option is 1 (2.00%):
This would be the result if the total GDP growth rate was 4% (0.20/5) and the population growth rate was 2% (0.04 - 0.02 = 0.02), or if the per capita growth was equal to the population growth rate, which contradicts the Harrod-Domar model calculation based on the given parameters. It is also the given population growth rate, which is not the per capita real GDP growth rate.

The incorrect option is 3 (4.00%):
A 4.00% per capita growth rate would imply a total GDP growth rate of 6% (0.04 + 0.02), which would require an investment level of 30% (0.30/5 = 0.06), contradicting the given investment level of 25%.

The incorrect option is 4 (5.00%):
This figure represents the **total** real GDP growth rate (0.25 / 5 = 0.05) before accounting for population growth. To find the per capita growth, the population growth rate must be subtracted.