Place each statement in the appropriate category; GDP grows faster or GDP grows slower: a. with investment b. with efficient financial markets c. when rule of law is applied equally and generally respected d. with inadequate public health e. when consumption is a large fraction of GDP f. with limited educational opportunities g. during war
The correct answer and explanation is:
Correct Categorization:
GDP Grows Faster:
- a. with investment
- b. with efficient financial markets
- c. when rule of law is applied equally and generally respected
GDP Grows Slower:
- d. with inadequate public health
- e. when consumption is a large fraction of GDP
- f. with limited educational opportunities
- g. during war
Explanation (300 words):
Gross Domestic Product (GDP) measures the total output of goods and services in an economy. Various factors influence whether GDP grows faster or slower, largely depending on the strength of institutions, the efficiency of resource allocation, and long-term human and physical capital development.
Factors that lead to faster GDP growth include:
- Investment (a): Capital investment in machinery, infrastructure, and technology boosts productivity and future economic output.
- Efficient financial markets (b): These allow savings to be converted into productive investments by allocating capital where it is most needed and profitable.
- Rule of law (c): When laws are enforced fairly and consistently, it creates a stable environment for businesses and individuals to invest and innovate, promoting long-term economic growth.
On the other hand, GDP grows slower when:
- Inadequate public health (d): Poor health reduces the productivity of the workforce and increases healthcare costs, limiting economic efficiency and output.
- High consumption share in GDP (e): While consumption drives demand, excessive reliance on consumption rather than investment limits capital accumulation, hindering future growth.
- Limited educational opportunities (f): A poorly educated workforce lacks the skills needed for innovation and efficiency, reducing overall productivity and competitiveness.
- War (g): Although military spending may temporarily boost output, war typically destroys infrastructure, displaces populations, and diverts resources from productive uses to destruction, leading to long-term economic setbacks.
In summary, sustained GDP growth relies heavily on sound investments in physical and human capital, strong institutions, and stable environments. Conversely, weaknesses in health, education, institutions, or peace can undermine a country’s ability to grow economically.