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Unformatted text preview: Econ 1, Fall 2010 Practice Midterm 2 Suggested Solutions University of California, Berkeley Page 1 of 8 Practice Midterm #2 Suggested Solutions 1. International question: Write one paragraphfour sentences or soexplaining what the balance of trade is, and why it is an important concept in international economics. The balance of trade is the value of a countrys net exportsthat is, the total value of its exports minus the total value of its imports. If net exports are positive there is a trade surplus, and if they are negative there is a trade deficit. Large and persistent trade surpluses or deficits will put pressure on exchange rates to adjust such that the currencies of surplus nations strengthen relative to the currencies of deficit nations. 2. Growth question: Chinas total GDP today is about 1/6 that of the United States. Chinas population is about four times that of the United States. The current level of GDP per capita in the United States is about $45,000 of marketed final goods and services produced per year. Current projections are thatif nothing goes wrongGDP per capita in China will grow at an average rate of 6% per year for the foreseeable future. Current projections are that GDP per capita in the U.S. will grow at an average rate of 2% per year for the foreseeable future. In what year do you project that average GDP per capita in China will equal its level in the United States? What will the level of annually produced GDP per capita be in that year? Recall that GDP per capita is GDP divided by population. Assuming as stated that the level of U.S. GDP is six times higher than Chinas and that China has four times the population of the U.S., per capita GDP is 24 times higher in the U.S. than in China. By the rule of 72, per capita GDP in the U.S. will double every 72/2 = 36 years, while it will double every 72/6 = 12 years in China. This means that in 36 years per capita GDP will double three times in Chinathat is, it will increase eightfold every 36 years. Starting at their relative sizes of 24 to 1 at the present, in the future the levels will be expected to grow as follows: U.S. China at present 24 1 in 36 years 48 8 in 72 years 96 64 In 108 years 192 512 The table above shows that they will be equal at some year between 72 years and 108 years in the future. To get a more precise answer, use the formula for exponential growth: in t years, a quantity C growing at an annual rate of k % will increase to C t = C e kt . The number of years t in the future when the per capita levels of GDP will be the same in the U.S. and China is given by: Econ 1, Fall 2010 Practice Midterm 2 Suggested Solutions University of California, Berkeley Page 2 of 8 gG .g = . [gG .g ] = [ . ] gG + [ .g ] = [ . ] gG + .g = . .G = gG = gG .G .G That is, in approximately 79.45 years (that is, in 2090 or so) the per capita level of GDP will be the That is, in approximately 79....
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