Question

Suppose that real GDP per capita of a rich country is $40,000. Real GDP per capita in a poor country is $10,000. Suppose that rate of growth of GDP per capita in the rich country is 2.33% per year and in the poor country is 7% per year. Using the "Rule of 70", calculate how many years it will take for GDP per capita in the poor country to catch up with GDP per capita in the rich country?

Answer 1

Step-by-step explanation:

According to the rule of 70, suppose there is a sum of money that is invested at a certain interest rate (rate of return), then the doubling time (or the number of years after which it will be doubled) can be computed by dividing 70 with the given interest rate. Interestingly, this rule can be applied to the growth rate of GDP to calculate the doubling time

Doubling time in rich country = 70/2.33 = 30 years

Doubling time in poor country = 70/7.2 = 9.7 years = 10 years

So real GDP per capita will become $80000 in rich country in 30 years while in the same time real GDP per capita in poor country will become $20.000 in first 10 years and $40,000 in next 10 years.

In this manner, after 40 year, real GDP per capita will become $160000 in rich country in 40 years from now while in the same time real GDP per capita in poor country will become $160.000

Hence the required catch up time is 40 years