Based on Observation 1, in the long run the ratio of profits to GDP in Country A is most likely to:

A. remain near its current level.

B. increase from its current level.

C. decrease from its current level.

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Hans Schmidt, CFA, is a portfolio manager with a boutique investment firm that specializes in sovereign credit analysis. Schmidt's supervisor asks him to develop estimates for GDP growth for three countries. Information on the three countries is provided in Exhibit A. EXHIBIT A Select Economic Data for Countries A, B, C Country A B C Economy Developed Developed Developing Capital per Worker High High Low After gathering additional data on the three countries, Schmidt shares his findings with colleague, Sean O'Leary. After reviewing the data, O'Leary notes the following observations: Observation 1: The stock market of Country A has appreciated considerably over the past several years. Also, the ratio of corporate profits to GDP for Country A has been trending upward over the past several years, and is now well above its historical average. Observation 2: The government of Country C is working hard to bridge the gap between its standard of living and the living standards of developed countries. Currently, the rate of potential GDP growth in Country C is high. Schmidt knows that a large part of the analysis of sovereign credit is to develop a thorough understanding of what the potential GDP growth rate is for a particular country and the region in which the country is located. Schmidt is also doing research on Country D for a client of the firm. Selected economic facts on Country D are provided in Exhibit B. EXHIBIT B Select Economic Facts for Country D Slow GDP growth Abundant natural resources Developed economic institutions Prior to wrapping up his research, Schmidt schedules a final meeting with O'Leary to see if he can provide any other pertinent information. O'Leary makes the following statements to Schmidt: Statement 1: "Many countries that have the same population growth rate, savings rate, and production function will have growth rates that converge over time." Statement 2: "Convergence between countries can occur more quickly if economies are open and there is free trade and international borrowing and lending; however, there is no permanent increase in the rate of growth in an economy from a more open trade policy."