MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 6, Problem 1TY
To determine
Difference between the growth rate of
Expert Solution & Answer
Explanation of Solution
GDP measures the value of all final goods and services produced by an economy in an accounting year.
It is given that the economy of countries A and B grow at an annual rate of 3 percent and 4 percent respectively. And the two countries start with a similar GDP.
The growth rate after 25 years can be calculated using the following formula-
Here,
FV represents the
PV represents the present value of GDP
t represents the total number of years
Assuming, the GDP of both countries equal to $10 at the initial stage. Plug the given values in (1) to determine the value of the GDP of both the countries after 25 years.
Country A
Thus, the future value of country A's GDP is equal to $20.094.
Country B
Thus, the future value of country B's GDP is equal to $26.65.
After 25 years, country B's economy is larger than country A by the following proportion,
Thus, country B's economy is approximately 27% higher than country A. The answer is not 25% because the rate at which the economy is growing is compounding.
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