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Chapter 18: Q. 5 (page 412)

Suppose that every 500 billion of dead capital reduces the average rate of growth in worldwide per capita real GDP by 0.1 percentage point. If there is 10 trillion in dead capital in the world, by how many percentage points does the existence of dead capital reduce average worldwide growth of per capita real GDP?

Short Answer

Expert verified

2% of points makes the existence of dead capital reduce average worldwide growth of per capita real GDP.

Step by step solution

01

Introduction.

Annual real GDP per capita growth rate The percentage change in real GDP per capita between two consecutive years is used to compute the annual growth rate of real GDP per capita. GDP at constant prices divided by the population of a country or territory yields real GDP per capita.

Given:

Global average growth rate in real per capita income=0.1%

02

Find the average rate of growth per capita real.

Each 500billion dollars of dead capital diminishes the average rate of real GDP per capita by 0.1percent. Calculation of average real GDP per capita with 10trillion dollars in dead capital:

=10trillion0.5trillion×0.1%=2%

FYI,

1000billion=1teillion

Therefore,

500billion=0.5trillion

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Most popular questions from this chapter

A developing country has determined that each additional 1billion of net investment in capital goods adds 0.01percentage point to its long-run average annual rate of growth of per capita real GDP.

a. Domestic entrepreneurs recently began to seek official approval to open a range of businesses employing capital resources valued at 20billion. If the entrepreneurs undertake these investments, by what fraction of a percentage point will the nation's long-run average annual rate of growth of per capita real GDP increase, other things being equal?

b. After weeks of effort trying to complete the first of 15stages of bureaucratic red tape necessary to obtain authorization to start their businesses, a number of entrepreneurs decide to drop their investment plans completely, and the amount of official investment that actually takes place turns out to be 10billion. Other things being equal, by what fraction of a percentage point will this decision reduce the nation's long-run average annual rate of growth of per capita real GDP from what it would have been if investment had been 20billion?

Suppose that a foreign resident has bought 20 percent of the shares of a company based in a developing nation but is experiencing difficulty determining whether the firm has responded to this purchase by engaging in risker behaviour. What type of investment has this foreign resident undertaken, and what type of asymmetric information problem is she or he experiencing?

Explain why population growth can have uncertain effects on economic growth.

In principle, how could a nation maintain a relatively high rate of economic growth even if it also has a relatively high rate of population growth?

Last year, \(100million in outstanding bank loans to a developing nation's government were not renewed, and the developing nation's government paid off \)50million in maturing government bonds that had been held by foreign residents. During that year, however, a new group of banks participated in a \(125million loan to help finance a major government construction project in the capital city. Domestic firms also issued \)50million in bonds and $75million in stocks to foreign investors. All of the stocks issued gave the foreign investors more than 10percent shares of the domestic firms.

a. What was gross foreign investment in this nation last year?

b. What was net foreign investment in this nation last year?
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