Answer to Question #317765 in Macroeconomics for Raj

Question

“Among countries that have the same steady state, the convergence hypothesis should hold:

poor countries should grow faster on average than rich countries”. Explain with graphs and 

examples. (Romer Model)

Answer 1

Nations trade for the same reason. When poorer nations use trade to access capital goods (such as advanced technology and equipment), they can increase their TFP, resulting in a higher rate of economic growth. Romer predicts that rich countries should grow faster than poor countries because of a higher stock of knowledge (i.e., divergence). Solow predicts that countries with low capital intensity should grow faster (convergence). Similarly, it is found that, in general, poor countries tend to grow faster than rich countries. However, this observation holds especially strongly for 17 countries with real per capita product above $1000 as shown by the diagram below.