Assume the following problem is based on 2010 economic data for the following co

Question

Assume the following problem is based on 2010 economic data for the following countries associated with the North American Free Trade Agreement (NAFTA):

United States

Mexico

Real GDP per capita $44,000

Real GDP per Capita $11,000

a. What is the definition and the formula for the rule of 70?
b. Assuming that real GDP per capita in Mexico grows at the rate of 5 percent per year, how long will it take for Mexico’s economy to double?
c. How many years will it take for Mexico’s economy to reach the level of the United States real GDP per capita in 2010?
d. Using economic growth theory, what has helped Developing Countries (DVCs) like the “Asian Tigers” of Singapore, South Korea, Thailand, Hong Kong, and Japan transform into Industrially Advanced Countries (IACs)? e. Based on our discussion in class, Superstar Economist Alan Greenspan classified the large transition economies of India and China as “Elephants.” Explain the meaning of this phrase

United States

Mexico

Real GDP per capita $44,000

Real GDP per Capita $11,000

Explanation / Answer

a) The rule of 70 is a way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable.

b) 70/5= 14 years

c) Since it takes 14 years to double the GDP it will take 28 years to make GDP same as that of US.

44000 = 11000(1+0.05)^t

On solving we get t= 28 years

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