Starting from a year in which gross domestic product for the economy is $8,000 billion, calculate how much output the national economy would produce in each of the next five years if it continued to grow at its potential real growth rate of 3%.How much output would the economy produce in each year if it grew by 4% the first year, 2% the second year, 1% the third year, -1% the fourth year, and -3% the fifth year? (Note: A negative growth rate means output is declining.)By the fifth year, how far is output below its potential level?
What will be an ideal response?
| ? | Potential Output (billions) | Actual Output (billions) |
| Year 1: $8,000 × 1.03 = $8,240 | $8,000 × 1.04 = $8,320 |
| Year 2: $8,240 × 1.03 = $8,487 | $8,320 × 1.02 = $8,486 |
| Year 3: $8,487 × 1.03 = $8,742 | $8,486 × 1.01 = $8,571 |
| Year 4: $8,742 × 1.03 = $9,004 | $8,571 × 0.99 = $8,486 |
| Year 5: $9,004 × 1.03 = $9,274 | $8,486 × 0.97 = $8,231 |
[Note: Don't worry about rounding differences that arise in problems like this, because such differences depend on how many digits you carry over from one calculation to the next.]
Output is below potential output by [(9,274 - 8,231)/9,274] × 100% = 11.2%.
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