Suppose that the government estimates that the increase in physical capital over the last year has been 10%, and for each percentage increase in physical capital, real GDP has grown by 0.25%. By how much has the increase in physical capital increased real GDP?

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BlackTom AI · Accepted Answer

The question asks how much real GDP increases when physical capital rises by 10%, given that for every 1% increase in physical capital, real GDP grows by 0.25%.

First, identify the relationship: a 1% increase in capital yields a 0.25% increase in GDP. This implies a linear, proportional effect where GDP change = 0.25% × (percent change in capital).

Next, apply the given change in capital: 10% increase in physical capital. Multiply by 0.25% per 1% capital increase: 0.25% × 10 = 2.5%.

This is a straightforward multiplication with no compounding provided in the problem, so the total GDP increase is 2.5%.

A potential confusion to avoid: if someone misreads the 0.25% as a percentage point change or misapplies a multi-year accumulation, they might arrive at an incorrect figure. Here, the problem explicitly states GDP grows by 0.25% for each percentage point increase in capital, so the correct interpretation is a simple product of 0.25 and 10.

Since the answer options are not shown in the provided data, we cannot evaluate alternatives, but the calculation shows the increase in real GDP should be 2.5% under the given assumptions.

Suppose that the government estimates that the increase in physical capital over the last year has been 10%, and for each percentage increase in physical capital, real GDP has grown by 0.25%. By how much has the increase in physical capital increased real GDP?

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