Question

Which of the following are true of capital as a determinant of economic growth? Check all that apply.

a. Capital investment decreases per capita real GDP.

b. As consumption increases, capital formation also increases.

c. Countries with higher investment rates tend to have higher growth rates.

d. Technological advances allow more output from the same amount of capital.

Answer 1

a.

The GDP can be defined the market value of all goods and services which are produced in the domestic territory of the country in the current financial years. GDP by Expenditure method

GDP=C+I+G+X-M

Since real GDP is inflation adjusted because it is calculated based on the base year prices rather than current year prices.

Since economic growth means an increase in the production of output in the economy compare to previous time period.

The economic growth it is possible through more investment in the capital stock.

So when capital investment increases, then production of goods and services increases, so the real GDP increases. Since real GDP increase leads to an increase in per capita real GDP.

Statement a is false.

It is not necessarily true that when consumption increases, capital formation also increase.

Hence option b is not correct.

Countries with higher investment rates tend to have higher growth rates. This is true because it leads to more production of goods and services, so real GDP increases. Hence the growth rate increases.

Hence statement c is correct.

d. Technological advances allow more output from the same amount of capital. This is because with technological advancement, the productivity of the workers increase. Hence more outputs are produced. So real GDP increases. Hence the growth rate increases.

Hence statement d is correct.

The correct answer is option c and d.