4.10 Economic Growth and Economic Development Strategies

The economic growth rate is calculated as: $\text{Growth Rate (\%)}=\frac{{\text{GDP}}_{\text{current}}-{\text{GDP}}_{\text{previous}}}{{\text{GDP}}_{\text{previous}}}\times 100$

Current year GDP = $672billion;previousyearGDP=$640 billion. The change in GDP = $672-$640 = $32$ billion.

$\frac{32}{640}\times 100=0.05\times 100=5.0\%$

The economic growth rate is 5.0%, meaning the economy's total output expanded by 5% over the year. Always express the answer as a percentage and use real GDP to avoid overstating growth due to inflation.

The question asks for the percentage change in real GDP from last year to this year. This requires applying the growth rate formula, not simply subtracting the two figures.

4.5% would require a GDP change of $0.045\times 640=28.8$ billion, but the actual change is $672-640=32$ billion. This option is too low.

4.8% would require a change of $0.048\times 640=30.72$ billion, which is still less than the actual change of $32 billion. This option is also too low.

5.2% would require a change of $0.052\times 640=33.28$ billion, which exceeds the actual change. This option is too high.

Only 5.0% is consistent with the calculation: $\frac{32}{640}\times 100=5.0\%$. This is the correct economic growth rate.

Nominal GDP rises when either the volume of output increases or prices rise. Real GDP adjusts for inflation, so it reflects only changes in the actual quantity of goods and services produced.

Nominal GDP growth = $\frac{330-300}{300}\times 100=10\%$. However, this includes the effect of a 5% rise in the price level.

To isolate real output growth, subtract the inflation rate from nominal growth: approximately $10\%-5\%=5\%$, or more precisely $\frac{1.10}{1.05}-1\approx 4.76\%\approx 4.8\%$. This is the genuine growth in output volume.

The statement that nominal GDP growth overstates real growth and real output growth is approximately 4.8% is correct. Using nominal GDP without adjusting for inflation would exaggerate the true expansion of output.

The question tests whether students understand that nominal GDP growth can reflect price increases rather than genuine output expansion, and that real GDP must be used to measure true economic growth.

"Both nominal and real GDP have grown by 10%" is incorrect. Real GDP adjusts for inflation; if prices rose 5%, real output growth is significantly less than 10%.

"Price increases have no effect because GDP is always quoted in real terms" is incorrect. GDP figures can be reported in nominal or real terms; one must actively adjust for inflation to obtain real GDP.

"Real output has expanded by approximately 4.8%, confirming genuine economic growth" is partially correct in the number but wrong in reasoning — it fails to acknowledge that nominal growth overstates real growth, which is the key conceptual point.

Nominal GDP growth overstates real growth; after adjusting for inflation, real output growth is approximately 4.8% correctly identifies both the overstatement issue and the approximate real growth figure.