Closing the Gap

STUDENT'S VERSION

This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student

INTRODUCTION

If you heard a television newscaster say that the economy grew by 1 percent last quarter, would you know what that means? The most commonly used measure of economic growth for any country is the Gross Domestic Product (GDP). GDP is the total market value of all the goods and services produced in a country in a given year, GDP, also is used as a measure of our standard of living. A standard of living is indicated by the necessities, comforts and luxuries enjoyed by an individual or group. If the ngraphewscaster reports a 1 percent rate of growth in the economy, that report means GDP increased by 1 percent from the previous period. Nominal GDP is GDP based on current prices. Real GDP is GDP adjusted for inflation. In order to compare different countries based on their economic performance, GDP per capita is used. This measure accounts for both the inflation rate and the population of the country. By reference to GDP per capita, two countries with very different populations can be compared. If two countries have a large difference in per capita GDP, then a divergence or gap exists. There is often a gap between the GDP of developed countries, such as the United States, and developing countries, such as India . When the gap between the two countries decreases or disappears, then convergence occurs.

TASK

In this lesson, you will learn how to calculate the GDP per capita as well as how GDP per capita is used to compare countries. You will look closely at the GDP of two countries, Mexico and Canada, and think about how the gap between the two could be bridged.

PROCESS

First, you will need to know what Real GDP per capita is and how to calculate it.

  • Real GDP per capita is simply the Real GDP of any country divided by its population.
  • Real GDP / Population = Real GDP per capita

Example: Using the CIA's World Fact Book you can find Luxemburg 's Real GDP and population in 2004. When we plug those numbers into the money calculatorequation, it looks like this:

$27,270,000,000 / 468,571 = $58,198 per person

Compare Luxemburg's Real GDP per capita to the United States .

Luxemburg = $58,198
United States = ?

You may have noticed that Luxemburg has a much higher Real GDP per capita than the United States. What do you think the reasons are for this big difference?

GDP per capita can vary widely from country to country. Developed countries such as the United States have higher GDP per capita figures than developing countries such as India.

Use this drag and drop activity to match countries with their Real GDP per capita.

Are you surprised by any of the countries' GDP? Are there any common factors in the countries with the lower GDPs per capita?

Now, let's compare the two closest neighbors of the United States--Canada and Mexico. Which of the two countries has the highest GDP per capita? Using the CIA World Fact Book, look at the Economy section for Canada andMexico to find the information you need.

CONCLUSION

Did you think that Canada would have a higher per capita GDP than Mexico? What factors might explain the difference in GDP per capita between Canada and Mexico? Does the per capita GDP of each country support your general impression of the standard of living in the two countries?

ASSESSMENT ACTIVITY

As we saw previously, there is a big difference in the standard of living between Canada and Mexico. In order for Mexico to get closer to the Canadian GDP per capita, the growth rate of Mexico would need to wealthybe higher than Canada's. This would, over time, cause convergence with the two GDPs. In other words, the gap between the two GDPs per capita would be closed. According to the World Fact book, the GDP growth rate for Canada is 2.4 percent and is 4.1 percent for Mexico. There is a shortcut method to finding out when a sum will double based on a known growth rate. This is known as the Rule of 72 (a definition for the Rule of 72 can be found at EconEdLink). It involves dividing the number 72 by a percentage growth rate. For example, if a growth rate is 6 percent, then the sum in question will double in 12 years (72/6). Using the Rule of 72 and rounding the growth rate of Canada to 2 percent and Mexico's growth rate to 4 percent , calculate how long it will take the GDP of Canada and Mexico to double. Calculate what the GDP per capita will be in 36 years for both countries. Is there still a significant gap between the two countries? In order for Mexico to close the gap with Canada, it would need a higher growth rate in GDP. Let's assume Mexico can raise its growth rate to 6 percent while Canada's growth rate stays at approximately 2 percent. In 36 years, how many times would Mexico's GDP double? What would be the GDP per capita of both countries in 36 years? Has the gap closed or been eliminated? Can you think of any ways for Mexico to raise its growth rate?

EXTENSION ACTIVITY

Can you think of ways in which the United States would benefit if Mexico increased its standard of living, bringing it closer to Canada's standard of living?