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Use an example to explain why, after periods of rapid growth, a low-income country that has not caught up to a high-income country may feel poor.

Short Answer

Expert verified

Convergence.

Step by step solution

01

Step1. Introduction

Low-income countries are the one where the economic growth has been fairly poor, while high-income countries are the one where the economic growth has been high.

It has been observed that after periods of rapid growth, a low-income country that has not caught up to a high-income country may feel poor.

02

Step2. Explanation

When the growth rate in low-income countries is higher in comparison to high-income countries that reflect the convergence. Convergence between low-income countries and high-income countries depends on the growth rates of the country.

When a low-income country's growth rate is higher than the high-income country's growth rate that process intends the convergence. In this situation, both low-income and high-income countries grow rapidly but the low-income country growth rate is higher then also it feels to be poor than a high-income country because the total income of low-income country will be less than the high-income country.

03

Step3. Example

Suppose a low-income country has a GDP of $1,000 and a high-income country has a GDP of $10,000. The growth rate of a low-income country is 5% and a high-income country is 3% for 10 years.

After 10 years low-income country's GDP will be $1,628

1000* (1+0.05)^10

=$1628

After 10 years high-income country's GDP will be $13,439

10000*(1+0.03)^10

=$13439

As the GDP of a low-income country after 10 years is less than the GDP of a high-income country after 10 years thus the low-income country feels poor in comparison to a high-income country.

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