Question

Suppose two countries initially start off at the same GDP per capita in 1940. After 70 years the countries have large differences in GDP per capita in the year 2010, with one country having $30,000 more than the other country. What is the most likely reason for this large disparity in GDP per capita between the two countries?

The differences in the amount of government spending per capita between the two countries

The differences in GDP per capita growth relative to productivity growth between the two countries and the effect of compounding declines

The differences in GDP per capita growth between the two countries and the effect of compounding

The differences in the severity of the business cycles between the two countries

Answer 1

Answer: Option B

The GDP growth rate relative productive growth was one of the driving factors of overall growth during the late 20th century. The more technological investment, higher was the productivity. Along with the compounding could have played a major role. By compounding we mean the reinvestment with the help of already generated revenue. This means that capital is used to its fullest thus increasing productivity. Maybe the country with Low GDP per capita might have experienced a declining compounding further abetting a downturn in the GDP growth rate.

The difference in government spending or business cycle is not a huge factor (can be temporary ones) in comparison to the one stated above, therefore the large gap can be explained by option B.

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