Economist In 2015 the rate of economic growth per capita in Brazil is 1.8% per y

Question

Economist In 2015 the rate of economic growth per capita in Brazil is 1.8% per year, Venezuela it is 3.6%. The level of per capita real GDP was $28,900 in Brazil and S$12,700 in Venezuela. Assume the growth rates for each country remain the same. Which country wi lave a higher level of potential output in 2050 and how much will it be? Suppose that real GDP per capita of Morocco is $30,000. RGDP per capita in Andorra is 15,000. Suppose that rate of growth of real GDP per capita in Morocco is 3.17% per year and in Andorra it is 6.34% per year. Using the rule of 72. calculate how many years it will take or RGDP per capita in Andorra to catch up with RGDP per capita in Morocco.

Explanation / Answer

ans1.

potential output in 2050

in brazil

initial level , GDPB= 28900 and rate of growth, RB=1.8%

GDP IN 2050 =28900*(1+0.018)35= 53959.77

in VENEZUELA

initial level , GDPV= 12700 and rate of growth, RV=3.6%

GDP IN 2050 =12700*(1+0.036)35=43792.04

IN 2050, BRAZIL WILL HAVE HIGHER POTENTIAL LEVEL OF OUTPUT OF  53959.77

ANS 2

GDPM= 30000 AND RM= 3.17%

GDPA=15000 AND RA= 6.34%

LET YEARS RGDP OF ANDORA WILL TAKE TO CATCH UP WITH MOROCCO = N

NOW

GDPA (1+RA)N= GDPM (1+RM)N

15000(1+0.0634)N = 30000 (1+ 0.0317)N

(1+0.0634)N/(1+ 0.0317)N = 2

(1.031)N =2

TAKING LOG BOTH SIDES

N LOG(1+0.031) = LOG 2

N= LOG2/ LOG(1+0.031) THIS IS WHAT RULE 72 SAYS , TIME PERIOD TO DOUBLE = LOG2/ LOG(1+R)

N= 22.7044

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