Two countries start with equal GDPs The economy of Country A

Two countries start with equal GDPs. The economy of Country A grows at an annual rate of 3 percent, whereas the economy of Country B grows at an annual rate of 4 percent. After 25 years, how much larger is Country B\'s economy than Country A\'s economy? Why is the answer not 25 percent?

Solution

The answer is not 25 percent because in the beginning both the company start with equal or same GDPs. So in the first year the annual rate will be same. From the second year the annual rate of both the companies differ by 1 percent. So taking the same rate of annual return in the first year, and difference from the second, after 25 years it will not be 25 percent, because in the first year the annual rate of both the companies are same and the there is a difference from the second year onwards.