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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 Spring '07
 Kasilwal
 Economics, Macroeconomics, Supply And Demand, Gambia

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