Question

Compare a hypothetical DVC with a hypothetical IAC. In the DVC, average per capita income is \(\$ 500\) per year. In the IAC, average per capita income is \(\$ 40,000\) per year. If both countries have a savings rate of 10 percent per year, the amount of savings per capita in the DVC will be _____ per person per year, while in the IAC it will be _____ per person per year. a. \(\$ 50 ; \$ 4,000\) b. \(\$ 5 ; \$ 400\) c. \(\$ 450 ; \$ 36,000\) d. None of the above.

Short answer

The answer is a. \( \$ 50 ; \$ 4,000 \).

Step-by-step solution

Calculate DVC Savings per Capita

To find the savings per capita in the Developing Country (DVC), multiply the average per capita income by the savings rate. The formula is: \ \[ \text{Savings per capita in DVC} = \text{Average Income} \times \text{Savings Rate} \]\Substitute the given values:\\[ = 500 \times 0.10 = 50 \]\Thus, the savings per capita in the DVC is \( \$ 50 \) per year.

Calculate IAC Savings per Capita

To find the savings per capita in the Industrially Advanced Country (IAC), use the same formula as in Step 1: \ \[ \text{Savings per capita in IAC} = \text{Average Income} \times \text{Savings Rate} \]\Substitute the given values:\\[ = 40,000 \times 0.10 = 4,000 \]\Hence, the savings per capita in the IAC is \( \$ 4,000 \) per year.

Compare Results with Options

Since the calculated savings per capita in the DVC is \( \\( 50 \) and in the IAC is \( \\) 4,000 \), compare these results to the provided answer choices. The correct choice is:\**a. \( \\( 50 ; \\) 4,000 \)**.

Key concepts

Developing vs. Industrialized Countries

Understanding the differences between Developing Countries (DVCs) and Industrialized or Industrially Advanced Countries (IACs) is crucial for grasping global economic dynamics. DVCs are nations with lower levels of industrialization and economic development. IACs, on the other hand, are characterized by significant industrialization, which often translates to higher individual incomes and a higher standard of living.

Key characteristics that distinguish DVCs from IACs include:

• Income levels: As illustrated in our exercise, DVCs typically have lower per capita incomes, often leading to lower savings and investment capabilities.
• Economic diversification: DVCs often rely on agriculture and raw materials, while IACs have diverse economies with significant contributions from service and technology sectors.
• Infrastructure: IACs usually have advanced infrastructure, facilitating better transportation, communication, and utilities, compared to DVCs.
• Health and education: Health care and education systems tend to be more advanced in IACs, contributing to higher literacy rates and life expectancies.

By understanding these differences, economists and policymakers can better address global economic challenges and development policies to bridge the gap between these two distinct groups of countries.

Per Capita Income

Per capita income is a vital indicator of a country's economic performance and living standard. It represents the average income earned per person in a nation over a specific period, typically a year.

In the exercise, the per capita income of the Developing Country (DVC) is $500, whereas for the Industrialized Country (IAC), it is $40,000. This vast difference illustrates the economic disparity between these two types of countries. The higher the per capita income, the greater the potential for spending, saving, and investment within that country.

Per capita income can be used for the following purposes:

• Economic comparison: Countries often utilize it to compare economic health and living standards across different regions.
• Policy making: Policymakers consider per capita income for setting policies on taxation and welfare.
• Attracting investment: A higher per capita income can make a country more attractive to foreign investors due to the population's greater purchasing power.

Understanding how per capita income reflects the economic well-being of a nation can provide insights into broader questions of economic development and international inequality.

Savings Rate

The savings rate is an essential economic metric that reflects the proportion of income that individuals or households save rather than spend. A consistent savings rate can be a critical driver of economic stability and growth. In our exercise, both the Developing Country (DVC) and the Industrialized Country (IAC) have a savings rate of 10%.

The impact of savings rate, however, can differ substantially depending on the country's per capita income:

• Increased savings potential: In IACs, even a moderate savings rate can result in substantial savings amounts due to higher incomes, as we see with the $4,000 savings per capita.
• Limited savings capacity: On the contrary, DVCs might accumulate lesser amounts, such as the $50 per capita savings observed, limiting their ability for large-scale investment in infrastructure or development.
• Economic resilience: Higher savings rates can cushion economies in times of financial stress, particularly for individuals, allowing for sustained consumption and investment.

Thus, understanding the savings rate is key for evaluating a nation's economic strategies and the individual financial health of its residents.