Suppose economies A and B have the same initial level of GDP per capita at $15,000, and each economy begins with a constant growth rate of 1 percent per year. (Neither country has good institutions for economic growth at first.) Then Country A enters an era of political stability, establishes property rights, and installs incentives for entrepreneurship. Country A's economic growth rate consequently improves to 5 percent. Assuming population growth rates remain unaffected, how much longer will it take Country B to double its per capita GDP level compared to Country A?

Question

Quizplus · Accepted Answer

Using the rule of 70, we can estimate how long it will take for a country's GDP to double. We divide 70 by the annual growth rate to get the number of years it will take.

For Country A:
It will take Country A approximately 70/5 = 14 years to double its GDP per capita level.

For Country B:
It will take Country B approximately 70/1 = 70 years to double its GDP per capita level without any improvements in growth rates.

Therefore, the difference between the two countries in terms of doubling time is 70 - 14 = 56 years. So, it will take Country B an additional 56 years to double its GDP per capita level compared to Country A.

Suppose Economies a and B Have the Same Initial Level