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Chapter 20: Q. 4 (page 495)

Assume there are two countries: South Korea and the United States. South Korea grows at 4% and the United States grows at 1%. For the sake of simplicity, assume they both start from the same fictional income level, $10,000. What will the incomes of the United States and South Korea be in 20 years? By how many multiples will each country's income grow in 20 years?

Short Answer

Expert verified

Income of South Korea after 20 years- $21,911 Income of United States after 20 years- $12,201

Multiples of South Korea- 2.1911 times

Multiples of US- 1.2201 times

Step by step solution

01

Step1. Given information

Present/ base income of both the countries- $10000

Growth rate of South Korea- 4%

Growth rate of US- 1%

Time- 20 years

02

Step2. a)Calculation

The formula for computing future income is:

Future Value= Present Value * (1+g)^t

where,

g is the growth rate

t is time

By applying above formula, income of South Korea after 20 years will be:

10000*(1.04)^20

10000*2.1991

$21991

By applying above formula, income of United States after 20 years will be:

10000*(1.01)^20

10000*1.2201

$12201

03

Step3. b)Calculation

The formula for calculating multiple of income growth is:

Present Value/ Future Value

By using the above formula multiple of South Korea's income growth in 20 years is:

2.1991 times

By using the above formula multiple of United States income growth in 20 years is:

1.2201 times

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Most popular questions from this chapter

Over the past 50 years, many countries have experienced an annual growth rate in real GDP per capita greater than that of the United States. Some examples are China, Japan, South Korea, and Taiwan. Does that mean the United States is regressing relative to other countries? Does that mean these countries will eventually overtake the United States in terms of the growth rate of real GDP per capita? Explain.

Say that the average worker in the U.S. economy is eight times as productive as an average worker in Mexico. If the productivity of U.S. workers grows at 2% for 25 years and the productivity of Mexico鈥檚 workers grows at 6% for 25 years, which country will have higher worker productivity at that point?

For a high-income economy like the United States,

what aggregate production function elements are most important in bringing about growth in GDP per capita? What about a middle-income country such as Brazil? A low-income country such as Niger?

Change in labor productivity is one of the most-watchedinternational statistics of growth. Visit the St.Louis Federal Reserve website and find the data section (http://research.stlouisfed.org). Find international comparisons of labor productivity, listed under the FRED Economic database (Growth Rate of Total Labor Productivity), and compare two countries in the recent past. State what you think the reasons for differences in labor productivity could be.

Would the following events usually lead to capital deepening? Why or why not?

  1. A weak economy in which businesses become reluctant to make long-term investments in physical capital.
  2. A rise in international trade.
  3. A trend in which many more adults participate in continuing education courses through their employers and at colleges and universities.
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