Question

You observe two countries. One country is a bottom billion country and an other is a richer European country. You see that GDP per capita grew much faster over the last ten years. Describe how this result could be consistent with both the Solow and Romer model. What would have to be true about the relative savings and population growth in the Solow model for this result to occur?

Answer 1

Both the Solow and Romer Model predict Low Developed Countries will ultimately catch up with the industrially advanced countries so that standard of living across the world equalizes. This is because the growth rate in Low Developed countries will be increasing at a higher rate as compared to the advanced nations which will ultimately lead to catching up of the economies. The Romer Model also predicts that the countries will catch up in their growth rate in the long run.

For this convergence to take place, it is necessary that the countries either have equal parameters like population growth rate, savings rate and the production function. Unconditional convergence will also occur if the advanced nations have low savings rate as the savings rate in the LDCs is low. A Low Developed Country will never catch up with a rich or industrially advanced country having a high savings rate. Thus, relative savings rate matter for the convergence to take place. Also population growth rate in the developed nation should be high for the convergence to take place in these models. If the advanced nations have low population growth rate then the convergence will not take place in these nations.