Assume that each $1$billion in net capital investment generates $0.3$percentage point of the average percentage rate of growth of per capita real GDP, given the nation's labor resources. Firms have been investing exactly $6$billion in capital goods each year, so the annual average rate of growth of per capita real GDP has been $1.8$percent. Now a government that fails to consistently adhere to the rule of law has come to power, and firms must pay $100$million in bribes to gain official approval for every $1$ billion in investment in capital goods. In response, companies cut back their total investment spending to $4$ billion per year. If other things are equal and companies maintain this rate of investment, what will be the nation's new average annual rate of growth of per capita real GDP?

Step by step solution

01

Given Information.

The following are the information to find annual rate of growth of per capita real GDP:

Total investment$=4$billion.

Percentage of investment in capital goods$=0.3\%$

Investment in capital goods$=1$billion.

02

Find the annual rate of growth of per capita real GDP.

1 billion investment in capital goods =0.3% of average rate of growth of per capita real GDP. If investment is 4 then the new average rate of growth of per capita real GDP:

$$\begin{gathered} =\frac{Totalinvestment\times Percentageofinvestmentincapitalgoods}{Investmentincapitalgoods} \\ =\frac{4\times 0.3}{1} \\ =1.2\% \end{gathered}$$

Hence, the average annual rate of growth of per capita real GDP is$1.2\%$

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