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Key for Problem set 3 Spring 2007

Key for Problem set 3 Spring 2007 - Economics 100 Key for...

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Economics 100 – Key for Problem Set #3 Spring 2007 Page 1 of 3 1. This question asks you to use the formulas of handout 3a to see the importance of long run economic growth for the Republic of the Gambia. The Republic of the Gambia is a tiny country in West Africa that is less than 48 km high and completely surrounded by Senegal. In 2005, real GDP per person stood at \$1000 for the Gambia (4 total points: 1 point each). a. Suppose that the Gambia continues to grow at an annual average growth rate of 3 percent. Using the compound interest formula, calculate the level of real GDP per person in 2025 (after 20 years). The general formula of compound interest is (1 ) n return principle r = × + . In this example, the return is real GDP per person in 2025, the principle is real GDP in 2005, r is the growth rate, and n is the number of years. Therefore, 20 \$1,000 (1 .03) \$1,806 return = × + = b. Suppose that the Gambia continues to grow at an annual average growth rate of 3 percent.

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