Essay which examines:

1) Whether economic growth models can explain (and if so to what extent) international variation in the standard of living, and;

2) Whether there is economic convergence, that is, whether poor countries tend to grow faster than rich countries.

Introduction

Economic is an important factor in the development of every country. For countries, economics symbolize national power. Economic growth brings high income, consumptions and investment and reduces the poverty. Many countries which were poor are becoming rich and powerful because of economic growth. That’s why people devote themselves to study economic growth. In Macro-economics, there are some economic growth theories, such as, classical growth theory, neo-classical growth theory and endogenous growth theory. Classical growth theory emphasizes the free market, which called invisible hand. An increase in GDP will increase the population. In long run, due to the limits of resource GDP and population will decrease. This theory consists of the views of Adam Smith, David Ricardo and Karl Marx. Neo-classical theory mostly relies on Solow model which states labour, capital and technology affect economic growth. Endogenous growth theory which primarily developed by Paul Romer and Robert Lucas expresses technology is exogenous factor and policies and institutions can influence growth. Different countries have different standard of living. This difference makes people in rich countries have better welfare, public institutions, goods and service. Nevertheless, nowadays, many poor countries also focus on economic growth. This essay will analyse different poor and rich countries’ GDP, real GDP and other data which explains the relationship between economic growth model and international variation in the standard of living and economic convergence.

Theoretical Framework

Robert M. Solow, an American economist, who was also a recipient of the John Bates Clark Medal in 1961 and the Nobel Memorial Prize Laureate in Economic Sciences in 1987, is best known for his endeavours on the hypothesis of economic growth. The Solow-Swan Neo-Classical Growth Model is an exogenous growth model where Solow isolated figures in economic growth into boosts in inputs, such as labour and capital, and technical progress and prompts to the steady state equilibrium of the economy.

Solow model is an exogenous growth model of long-run economic growth. Three factors: technology, capital accumulation and labour force that drive economic growth. The model attempts to explain long-run economic growth by looking at the rate of saving [s], population growth [n] and technological progress = steady state. It assumes a standard neoclassical production function with decreasing returns to capital (and labour). Given these assumptions, Solow demonstrates that with variable specialised coefficient there would be a propensity for the capital-labour ratio to change itself through time towards balance proportion in his model. (Solow, 1970)

Figure 1: Solow growth model diagram (Commons.wikimedia.org, 2017)

Whether the initial ratio of labour to capital is more, then labour and output would grow slowly than capital and vice versa. This growth analysis is convergent to equilibrium path – the steady state to begin with any capital-labour ratio. Given exogenous s, n and g (rate of tech progress) and a Cobb-Douglas production function: