If real GDP increases by 5 percent and the population increa

If real GDP increases by 5 percent and the population increases by 10 percent during the same period, real per capital income
    a. increases
    b. decreases
    c. remains unchanged
    d. increases if prices rise

Solution

Option (b).

To see why:

Let initial real GDP = 100

Initial population = 100

Initial per capita income (GDP) = Real GDP / Population = 100 / 100 = 1

Revised real GDP = 100 x 1.05 = 105

Revised population = 100 x 1.10 = 110

Revised per capita income (GDP) = 105 / 110 = 09545 < 1