If real GDP grows by 10 percent per year for two consecutive years what is the total growth?
Answer and explanation
Correct answer: 21 percent
Successive growth rates are compounded because the second 10% increase applies to the GDP after the first increase. Starting with 1, the level becomes 1 × 1.10 × 1.10 = 1.21 after two years. Hence total growth is (1.21 − 1) × 100 = 21%. Option B is correct. Simply adding 10% + 10% gives 20%, which ignores the larger second-year base.
Frequently asked questions
What is the correct answer to this question?
21 percent
Why is this the correct answer?
Successive growth rates are compounded because the second 10% increase applies to the GDP after the first increase. Starting with 1, the level becomes 1 × 1.10 × 1.10 = 1.21 after two years. Hence total growth is (1.21 − 1) × 100 = 21%. Option B is correct. Simply adding 10% + 10% gives 20%, which ignores the larger second-year base.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Real GDP and Nominal GDP.
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