Suppose that South Korea is growing at 7% per year and is producing real GDP per capita of about $28,000, while Norway is growing at 3.5% per year and is producing real GDP per capita of $56,000. If all else stays equal, the real GDP per capita for these two countries will converge in _____ years.

Question

Quizplus · Accepted Answer

The Solow Growth Model suggests that in the long run, countries with the same steady-state capital-to-labor ratio will have equal real GDP per capita. Since South Korea is growing at a faster rate than Norway, it will eventually catch up and reach the same steady-state capital-to-labor ratio. Using the rule of 70, we can estimate the time it takes for a variable to double by dividing 70 by the growth rate. Therefore, it will take approximately 20 years for South Korea's real GDP per capita to double, while it will take approximately 40 years for Norway's real GDP per capita to double. This means that in about 20 years, South Korea's real GDP per capita will be approximately half of Norway's real GDP per capita. Therefore, the real GDP per capita for these two countries will converge in approximately 20 years.

Suppose That South Korea Is Growing at 7% Per Year