Module 12: Economic Growth

[dsmith3]

This comes from NEAS online course for Macro.

Suppose Aram and Canaan have steady state levels of per capita income of 20,000 shekels per year. In 2007, Aram's per capita income is 15,000 shekels a year and Canaan's is 5,000 shekels a year.

A) If the gap between the steady-state level of per capita income and the actual level is eliminated at 2% per annum, what is the expected level of per capital income for 2008 in Aram and in Canaan?
B) What is the growth rate of per capital income from 2007 to 2008 in Aram and Canaan? Is this absolute convergence or conditional convergence or neither?
C) What is the dispersion in the countries' incomes in 2007 and 2008? IS the dispersion increasing or decreasing?(The dispersion is the difference in income in Aram vs Canaan).

Please HELP! Thanks.

[daaaave]

In Aram, the gap in 2007 between per capita income and the steady state is 20,000-15,000=5,000 shekels per year. If we eliminate 2% of that, then we reduce the gap by 100 shekels, meaning that the expected per capita income in 2008 is 15,100 shekels. The growth rate in Aram is 15,100/15,000.

The calculations for Canaan are similar, and you should get that the dispersion is decreasing.