Question

The Economic Growth​ Model's Prediction of​ Catch-Up

The economic growth model makes predictions about an​ economy's initial level of real GDP per capita relative to other economies and how fast the economy will grow in the future.

a. Consider the statistics in the following table. Are these statistics consistent with the economic growth​ model? Briefly explain.

Country	Real GDP per​ Capita, 1960​ (2005 dollars)	Annual Growth in Real GDP per​ Capita, 1960-2011
Taiwan	​$1,861	​5.81%
Panama	​2,120	​3.50%
Brazil	​2,483	​2.73%
Costa Rica	​4,920	​1.42%
Venezuela	​7,015	​0.91%

b. Now consider the statistics in the following table. Are these statistics consistent with the economic growth​ model? Briefly explain.

Country	Real GDP per​ Capita, 1960​ (2005 dollars)	Annual Growth in Real GDP per​ Capita, 1960-2011
Japan	​$5,586	​3.39%
Belgium	​10,132	​2.50%
United Kingdom	​11,204	​2.10%
Australia	​15,255	​1.85%

c. Construct a new table that lists all nine​ countries, from the lowest real GDP per capita in 1960 to the​ highest, along with their growth rates. Are the statistics in your new table consistent with the economic growth​ model?

Answer 1

The economic growth model predicts that countries which start with a lower level of per capita GDP will grow faster than countries with a high level of per capita income i.e. convergence hypothesis

a) The statistics are indeed consistent with the economic growth model because a country that has a lower level of per capita income in 1960 has a higher level of real GDP growth. This is true for any two countries in the data.

b) Again, the statistics are consistent with the economic growth model because a country that has a lower level of per capita income in 1960 has a higher level of real GDP growth. This is true for any two countries in the data as in Table(a)

c) Combining the two tables (a) and (b) and arranging in ascending order of per capita real GDP in 1960 we get the following table:

Country	Real GDP per​ Capita, 1960​ (2005 dollars)	Annual Growth in Real GDP per​ Capita, 1960-2011
Taiwan	​$1,861	​5.81%
Panama	​2,120	​3.50%
Brazil	​2,483	​2.73%
Costa Rica	​4,920	​1.42%
Japan	​$5,586	​3.39%

Venezuela	​7,015	​0.91%
Belgium	​10,132	​2.50%
United Kingdom	​11,204	​2.10%
Australia	​15,255	​1.85%

Now, we can observe that the data is not consistent with the economic growth model. There are countries with a higher level of real per capita GDP in 1960 that also have a higher growth rate. Take for eg:Costa Rica and Japan. Japan has both a higher per capita GDP in 1960 and a higher per capita GDP growth rate, thus a contradiction. This is true for some other pair of countries as well.