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Written Assignment Unit 2

The document discusses the "catch-up effect" where poorer countries experience faster economic growth and higher GDP per capita growth rates than developed countries. It would expect a country with low savings and education/health investments to have particularly high GDP per capita growth according to this theory. The catch-up effect can be shown graphically as poorer countries experience greater increases in GDP from additional capital investments due to diminishing returns. As these countries replicate technologies and benefit from globalization, their economies are able to grow faster and potentially converge with developed countries over time.

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99 views5 pages

Written Assignment Unit 2

The document discusses the "catch-up effect" where poorer countries experience faster economic growth and higher GDP per capita growth rates than developed countries. It would expect a country with low savings and education/health investments to have particularly high GDP per capita growth according to this theory. The catch-up effect can be shown graphically as poorer countries experience greater increases in GDP from additional capital investments due to diminishing returns. As these countries replicate technologies and benefit from globalization, their economies are able to grow faster and potentially converge with developed countries over time.

Uploaded by

Firew Abera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Written Assignment Unit 2

Written Assignment Instructions

Draw a graph of "catch-up" that shows where you would expect to see a country with low saving

rates and low levels of health and education.  How would you expect real GDP per capita to

grow in a country like this?  Explain your answer.


Introduction

According to Pettinger, T., and Racheal (2020, May 28), the catch-up effect (or

convergence theory) suggests that poorer countries will experience faster economic growth and,

over time, will be closer to the income levels of the developed world. They also stated that the

catch-up effect expresses the process by which low-income countries to come to high economic

or developed countries' growth rates of GDP.

Poor countries with low income, according to the catch-up effect or the convergence

theory, grow faster than developed and high economic or income countries, eventually catching

up to the high economic levels of developed countries. In other words, the catch effect predicts

that the income gap or difference between rich and poor countries will gradually narrow.

The catch effect can be represented graphically by plotting per-capita national income or

GDP on the y-axis and per-capita capital on the x-axis. The curve is then drawn by plotting the

per-capita GDP against the various units of per-capita capital. Because higher capital

investments are associated with higher per-capita GDP, the graph would be upward or

mathematically positive sloping. In contrast, the slope of this curve would be much higher or

steeper for the initial levels of per-capita capital and much lower (or flatter) for subsequent units

of per-capita capital.
81.4 82.2 82.8 84 84.4
76.2

per Capita GDP


55.7 56.3 53.9
49.4 50.3
Year
45.9
36.8 38.9 36.9
32.6 34.2
32.3 35.3
29.9
29.4 31.2
30.7 30 32.2
31.7
30.1 31.7 31.5
30
29.8
29.1 28.5
27.8 28.1
27.3 28.3
26.4 29
26 23.9 22.4
12.4
10.9 13.6
11.9 13.6
12.6 13.5
12.6 13.5
11.2 13
12.6

0 States
United Belgium
2010
Canada 2011 2012 2013
France 2014 2015
Brazil Mexico
South Korea Chad

According to the graph, any increase in per-capita capital units during the initial period

(when capital investment is very low) results in a greater increase in per-capita GDP than an

increase in per-capita GDP when capital investment is already very high. For example,

increasing the per-capita capital unit from 2010 to 2011 results in only a 1.2 unit increase in per-

capita GDP in the United States. However, increasing the per-capita units from 2010 to 2011

results in a 6 unit increase in Nigeria's per-capita GDP. This implies that the per-capita GDP

growth rate in poor countries with low per-capita capital is much higher than in developed

countries with significantly higher per-capita capital (due to lower savings and poor investment

in health and education).

As a result, low-income countries' incomes would eventually converge with those of developed

countries.

According to Greenlaw and Shapiro (2011), low-income economies that receive capital

inflows are likely to experience rapid catch-up economic growth. Here they can also use the

international financial capital inflow to assist spur physical capital investment.

The potential causes of the catch-up effect, according to Pettinger, T., and Racheal. (2020), are:
1. Law of diminishing returns
2. Replicate technology from other countries.

3. Globalisation and movement of labour and capital

Let us see one by one in detail

Law of diminishing returns: Any proportional increase in capital results in a relatively higher

proportional increase in output at a lower level of capital, resulting in a faster rate of real GDP

growth. Due to diminishing marginal returns at higher levels of capital investment, every unit of

capital generates very little increase in output. As a result, the rate of real GDP growth in the rich

countries is very low.

Replicate technology: Rich and developed countries invest heavily in technological

advancements and innovations. Poor countries, on the other hand, have an advantage because

they can easily replicate high-income countries' technologies, allowing them to increase

productivity much faster than developed countries. As a result, low-income countries' per-capita

GDP growth exceeds that of high-income countries.

Global forces: Multinational corporations have been forced to outsource production and

manufacturing units to countries with lower labor costs as a result of increased globalization and

international competition. As a result, poor countries benefit from inward investment because

labor demand rises in tandem with wage increases in these countries. As a result, the economies

of low-income countries have benefited.

Conclusion

Growth in real per capita GDP in low-income countries with low savings and low education and

health investments would be much higher than in high-income countries with high savings and

investments.
Word Count: 640

References:

Greenlaw & Shapiro, S. A. D. (2011). Principles of Macroeconomics (2e ed., Vol. 2). Timothy

Taylor. https://assets.openstax.org/oscms-prodcms/media/documents/Macroeconomics2e-

OP_WRQqkIv.pdf

Pettinger, T., & Racheal. (2020, May 28). The catch-up effect. Economics Help. Retrieved from

https://www.economicshelp.org/blog/143243/economics/the-catch-up-effect/

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