At the beginning of the year, one developing country (DVC)has a real income per capita of $800. In a developed country (IAC), the real income per capita is $30,000. Both countries experience a 4 percent growth rate for the year. At the end of the year, the absolute income gap between these two countries will have increased from $29,200 to

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The absolute income gap increases because both countries grow at the same percentage rate, but the base amounts are vastly different. For the DVC, a 4% increase on $800 is $32, making its new income $832. For the IAC, a 4% increase on $30,000 is $1,200, making its new income $31,200. The new gap is $31,200 - $832 = $30,368, which is an increase from the original $29,200 gap.

At the Beginning of the Year, One Developing Country (DVC)has