Question

In 2015 the median household income in Louisiana was approximately $45,000 per year, while the income per household in Massachusetts was about $69,000. However, suppose the growth rate of per capita real GDP in Louisiana is higher than Massachusetts (3 percent versus 2 percent).

a.) From the perspective of trying to maximize your income per capita, which state will have higher increases in income over the next few years?

b.) From the perspective of trying to maximize your income per capita, which state will have higher increases in income in the long run?

Answer 1

a. Over the next few years, the country with greater median income per household, Massachusetts will have higher increase in income over the next few years. This is because a country which starts off with a greater median income per household will have its people's income increasing at a higher rate in the short run even if the growth rate of per capital real GDP is lower than the country with a lower median income.

b. Since, growth rate of real GDP per capita is higher in Louisiana it will catch up with another country in few years and will have a higher median income per household in the long run as compared to Massachusetts as growth rate of real GDP is higher and thus Louisiana will have higher increases in income in the long run.