1. Two countries, Ruritania and Francia, have the same population, the same stock of physical capital, and the same human capital per worker in the year 2015. But Ruritania has a GDP per capita of $55,000 (in 2015 PPP), while Francia’s GDP per capita is $50,000 (again in 2015 PPP).

a. What explains the 10 percent GDP per capita difference between the two countries?

b. Ruritania goes on a public spending spree and builds new factories and infrastructure, increasing its physical capital stock by 20 percent between 2015 and 2020. In the meantime, the stock of physical capital in Francia and population and human capital per worker in either country remain constant. GDP per capita in Francia remains at $50,000 (in 2015 PPP), while Ruritania’s increases to $75,000 (also in 2015 PPP). What explains the 50 percent GDP per capita difference between the two countries in 2020? (Hint: Be specific about what you are assuming concerning technology and organization of production in Ruritania.)

c. Suppose next that Alemania also had the same stock of physical capital and the same population and human capital per worker as Francia and Ruritania in 2015 and the same level of GDP per capita as Francia. Its stock of physical capital and its human capital per worker remain unchanged between 2015 and 2020, but Alemania’s GDP per capita increases to $60,000 (in 2015 PPP). What explains the 20 percent GDP per capita difference between this country and Francia in 2020?

d. Imagine instead that between 2015 and 2020 Francia legislates that left-handed people cannot become managers, scientists, or medical professionals. Its physical capital stock, population, and human capital per worker remain unchanged between 2015 and 2020. In 2020, Francia’s GDP per capita declines to

$45,000 (again in 2015 PPP). What explains this difference?

Could the same factor accounting for the difference between 2015 and 2020 for Francia also explain the difference between Francia and Ruritania in 2015?