Question

dan demaar and rob runten are working on a class assignment on economic growth. dan collects the gdp growth data for the country fanez, which is located in the middle east. he states that the standard of living in fanez must have increased remarkably over the past ten years because its real gdp per capita increased from $5,000 to $5,633. rob does not fully agree that the situation has improved substantially over these 10 years. he looks at the data and points out, that growth in fanez was in fact very slow during this time. its annual growth rate, while always positive, never exceeded 1.2 percent.
while arguing that the growth rate was too low for living standards to have improved during these 10 years, which of the following relevant issues is rob ignoring?
a. the effect of high inflation in the economy
b. the slow growth of the countrys labor force
c. the share of fanez economy in global gdp

Explanation:

• Option A: The problem is about economic growth and living standards. High inflation would affect the real value. But since the data given is real GDP per capita (which already adjusts for inflation), this is not relevant.
• Option B: If the labor force grows slowly, even a small growth rate in real GDP per capita can lead to a more significant improvement in living standards. For example, if the population (labor - force related) grows slowly, a 1.2% growth in real GDP per capita can accumulate over 10 years to a noticeable increase (as from $5000 to $5633).
• Option C: The share of Fanez' economy in global GDP has no direct bearing on the improvement of living standards within Fanez.

Answer:

B. the slow growth of the country’s labor force