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2281 · 4.6

Economic growth — practice questions

Practice and worked examples for 2281 Economic growth. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Country A's real GDP was $2.0 trillion in 2023 and $2.12 trillion in 2024. Potential output (Yf) was $2.05 trillion in 2023 and $2.15 trillion in 2024.

(a) Calculate the actual growth rate. (b) Calculate the potential growth rate. (c) Describe the output gap in 2024 and its macroeconomic implication.

Show solution outline

(a) Actual growth rate = ((2.12 − 2.0) ÷ 2.0) × 100 = 6.0%

(b) Potential growth rate = ((2.15 − 2.05) ÷ 2.05) × 100 = 4.88% (≈ 4.9%)

(c) Output gap 2024 Actual Y (2.12tn)<Yf(2.12tn) < Yf (2.15tn) → negative output gap of 0.03tn0.03tn

Implication: economy is below full capacity — likely cyclical unemployment and scope for expansionary policy without much inflation.

Worked example 2

The economy of Country B recorded the following data:

  • 2022 Nominal GDP: $500 billion
  • 2023 Nominal GDP: $550 billion
  • GDP Deflator (2022 = 100): 100 in 2022, 105 in 2023.

(a) Calculate the Real GDP for 2022 and 2023 in 2022 prices. (b) Calculate the real economic growth rate between 2022 and 2023. (c) Calculate the nominal economic growth rate and explain why it differs from the real growth rate.

Show solution outline

(a) Calculate Real GDP Formula: Real GDP = (Nominal GDP / GDP Deflator) × 100

  • Real GDP 2022 = (500bn/100)×100=∗∗500bn / 100) \times 100 = **500 billion**
  • Real GDP 2023 = (550bn/105)×100=∗∗550bn / 105) \times 100 = **523.81 billion** (to 2 d.p.)

(b) Calculate Real Economic Growth Rate Formula: ((New Real GDP - Old Real GDP) / Old Real GDP) × 100

  • Real Growth = ((523.81bn−523.81bn - 500bn) / 500bn)×100=∗∗4.76%∗∗500bn) \times 100 = **4.76\%**

(c) Nominal Growth and Explanation

  • Nominal Growth = ((550bn−550bn - 500bn) / 500bn)×100=∗∗10%∗∗500bn) \times 100 = **10\%**
  • Explanation: The nominal growth rate (10%) is higher than the real growth rate (4.76%) because it includes the effect of inflation. The GDP deflator increased by 5%, indicating price rises. Real GDP growth strips out this price effect to show the true increase in the volume of output.
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