Question

In 2008 the real per capita income in an industrially advanced Country A was about $37,665

per year. The average real per capita income in low-income developing Country B was about $925 per year.

(a) What is the gap in the average standards of living between Country A and Country B based on their per capita income?

  

b). If real per capita income of Country B is to grow at an average annual rate of 7 %, using the rule of 70 how many years it will take for this country to be classified as middle-income country. Evaluate the benefits of increase in real per capita on the country’s economic growth and standards of living.

  

c). Assume the Country B has embraced globalization, discuss how the globalization promotes economic growth and development in low developed countries.

Answer 1

A. Assuming that the total population in both country A and country B is 100.

Standard of living in country A=37665/100 = 376.65

Standard of living in country B = 925/100 = 9.25

Difference in standard of living between country A and countey B = 376.65-9.25 = 367.40.

B. Rule of 70 tells about number of years it takes to double the money given a specified rate of return. In this case rate if return is 7 percent.

Number of years to double = 70/7 = 7.

Country B current per capita income is $ 925. For a country to move in to middle income country category as per wolrd bank Gross national.income should be between $1026 to $12475.

So keeping the world data in consideration, country B will be labelled as middle income economy in 7 years with its current per capita income of $ 925.

C. Now that country B has accepted globalisation, we will discuss how globalisation will promote economic growth and development.

1. Globalisation helps to open the market. As such countries welcome investment from other countries that pushes economic growth.

2. This leads to increase in (FDI) foreign direct investment. FDI increases at a much larger pace than the world trade, emphasises on technology and knowledge transfer, remavps existing industries, industrial restructuring and growth of global companies.

3. Due to globalisation mutiple competitors partocipate as such technological innovation takes place and technology gets a stimulus. This results in improvement of economic output as system gets more efficient.

5. Companies engage in largescale production with an intent to reduce costs and prices, as euch economies of scale gets a boost.

6. Interdependency between nations increases due to globalisation as such maintaining an atomosphere of harmony becomes incumbent among leaders of engaged countries. This also helps in stopping unwanted fights and resolve minor issues amicably.