As a country's economy grows and real GDP per capita rises, citizens often do not feel proportionately better off. Which statement provides a logical explanation for this?
A) GDP may be rising due to rising prices rather than rising output.
B) If the consumption portion of GDP is rising more rapidly than other categories of GDP, the average person may have less to consume.
C) As incomes rise, households may use the extra income to buy services and goods that they used to produce for themselves; thus, even though GDP is higher, how much they actually consume is not higher.
D) If the rise in output is due to an increase in the population, then the amount of goods available per person may not be rising.

Question

Quizplus · Accepted Answer

As incomes rise, households may use the extra income to buy services and goods that they used to produce for themselves; thus, even though GDP is higher, how much they actually consume is not higher. This is known as the income elasticity of demand for consumption goods being less than one. Additionally, people may also compare themselves to those who are better off, leading to a relative deprivation effect.

As a Country's Economy Grows and Real GDP Per Capita