Dimitri Wilson

MBA 6130 – Week 4 Homework

Dr. Ali Said
Question 1. Suppose nominal GDP in 2010 was $120,008,000 and in 2011 it was $130,000,000.
The GDP price index in 2010 was 140 and in 2011 it was 150. The population in 2010 was
25,600 and in 2011 it was 35,000.
Calculate Real GDP and Real GDP per capita in each year. (10 points)

- Real GDP 2010

GDP Price Index = Nominal GDP / Real GDP * 100
1.4 = 120,008,000 / Real GDP
Real GDP 2010 = 120,008,000/1.4
Real GDP 2010 = $85,720,000
Real GDP per capita 2010 = Real GDP / Population
= 85,720,000 / 25600
Real GDP per capita 2010 = $3348
- Real GDP 2011
1.5 = 130,000,000/ Real GDP
Real GDP 2011 = $86, 666,667
Real GDP per capita = 86,666,667 / 35,000
Real GDP per capita = $2476

Calculate the growth rate of Real GDP and of Real GDP per capita (15 points)

Real GDP Growth Rate = (86,666,667 - 85,720,000) / 85, 720,000 * 100

Real GDP Growth Rate= 1.1%
Real GDP per capita Growth Rate = (2476 - 3348) / 3348 * 100
Real GDP per capita Growth Rate= -26%
Question #3: In a couple of paragraphs, discuss the potential for Convergence. Be sure to
reference ideas from the text.
The convergence theory is the hypothesis that poorer countries per capita GDP will tend to grow
at a faster rate than rich economies, eventually catching up (or converging) with the rich
countries. Our book details how some low-income and middle-income economies around the
world have shown a pattern of convergence, in which their economies grow faster than those of
high-income countries. Developing countries have the potential to grow at a faster rate because
diminishing returns are not as strong as in capital rich countries. Poorer countries can also
replicate production methods, technologies and institutions currently used in developed
countries. Convergence is unlikely to occur if these production methods and technologies are not
freely shared, or if there are social/cultural/political limitations to adapting them. In many of
these poorer countries, the capital needed to catch up is too expensive. If the level of income is
close to subsistence, they will not have the money to save and invest in these technologies that
would allow them to grow.
Convergence is predicated on two main ideas: the law of diminishing marginal returns and
poorer countries have an advantage when it comes to replicating production methods. Our book
details how low-income countries like China and India show convergence works. These
countries tend to have lower levels of human capital and physical capital. Thus, an investment in
capital deepening should have a larger marginal effect in these countries than in high-income
countries, where levels of human and physical capital are already relatively high. Diminishing
returns implies that low-income economies could converge to the levels that the high-income
countries achieve. However, there is also evidence that suggests convergence is neither
inevitable nor likely. One main argument against the convergence theory is the advancement of
technology. In nearly every case, developing innovative technology can provide a way for an
economy to sidestep the diminishing marginal returns of capital deepening. Improved technology
means that with a given set of inputs, more output is possible. Most healthy, growing economies
are deepening their human and physical capital and increasing technology at the same time.
Ultimately, low-income countries have many opportunities to copy and adapt technology, but if
they lack the appropriate supportive economic infrastructure and institutions, the impact of
diminishing marginal returns becomes of little significance.