Question

1. One of the basic principles of classical growth theory is that over time, levels of economic activity should converge in most countries and that we would enjoy equal levels of prosperity. While we view some evidence of convergence, we also observe the continuation of stark and deep levels of global inequality

1. In one small paragraph, use our production function analysis to explain why we might predict economic convergence.
2. In an additional paragraph, use our production function analysis to explain why we might not be experiencing convergence.
3. What country are you a citizen of? Use the growth theory you have used in your previous answer to explain whether you are part of a country that is either:

1. Catching up to advanced capitalist countries,

2. Being caught up to by more rapidly growing countries, or

3. Still experiencing a big gap in living standards with no immediate prospects of catching up.

Briefly explain why the country you are a citizen of falls into the category you have chosen.

Answer 1

A. The classical view of growth convergence holds promise because returns to scale tend to be increasing in developing countries while they tend to remain constant or decreasing for developed countries. For example the national income growth rates for countries like China and India have been faster than to the USA or many of the European Union member countries. Conversely, the growth rates in developed economies are much lower. This validates that view that over a period of time the growth rates will converge.

B. Developed countries have attained economies of scale and scope and continue to innovate for furthering the economies of scale through innovation and research. These countries have achieved high level of factor productivity which is not seen being replicated by many of the developing countries across the world. Thus the theory of growth convergence might not hold true.This can also be explained through the middle income trap which is the case with most of the Asian economies.

C. Countries catching up with advance capitalist countries are- China, Singapore, South Korea etc.

Countries being caught up by more rapidly grwoing countries include Sri Lanka, India etc. as they are caught in the middle income trap.

Countries experiencing a big gap in living standards are almost all of the countries in African union as they have very low factor productivity.