Problem 8 Use an example to explain why, a... [FREE SOLUTION]

Chapter 7: Problem 8

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

In our example, Country A is a low-income country with a per capita income of $1,000 and Country B is a high-income country with a per capita income of $10,000. After a period of rapid growth (10% annually for Country A and 5% annually for Country B), Country A's per capita income increased to $1,610.5 while Country B's reached $12,763. Despite having a higher growth rate, Country A still lags far behind Country B because a 10% increase on a lower base results in smaller absolute growth than a 5% increase on a higher base. This income disparity makes Country A's citizens feel poor compared to Country B's citizens. To catch up, Country A must maintain higher growth rates for a longer time, invest in human capital, infrastructure, and technology to boost productivity.

Step by step solution

Define Rapid Growth, Low-Income Country, and High-Income Country

Rapid growth refers to an increase in a country's output or income at a rate that is significantly higher than its historical average. A low-income country is a nation with a relatively low average or per capita income when compared to other countries. A high-income country, on the other hand, is a nation with a relatively high average or per capita income.

Introduce the example

Consider two countries, A and B. Country A is a low-income country with a per capita income of $1,000, while Country B is a high-income country with a per capita income of $10,000. Suppose both countries experience rapid growth for a certain period, with Country A growing at a rate of 10% per year, while Country B grows at 5% per year.

Calculate the new incomes after the growth period

Let's assume the rapid growth period lasts for five years. At the end of this period, we can calculate the new per capita incomes for both countries using the formula: New per capita income = Initial per capita income * (1 + growth rate) ^ number of years For Country A: New per capita income = $1,000 * (1 + 0.1) ^ 5 New per capita income = $1,000 * (1.6105) New per capita income = $1,610.5 For Country B: New per capita income = $10,000 * (1 + 0.05) ^ 5 New per capita income = $10,000 * (1.2763) New per capita income = $12,763

Compare the new incomes and explain the feeling of being poor

Even after the rapid growth period, Country A's per capita income has only increased to $1,610.5, whereas Country B's has reached $12,763. Despite Country A's higher growth rate, it is still far behind Country B. This is because even a 10% increase on a lower base ($1,000) amounts to smaller absolute growth than a 5% increase on a higher base ($10,000). Therefore, after the rapid growth period, the citizens of Country A may feel poor compared to their counterparts in Country B due to the still existing income disparity. To catch up, Country A must maintain higher growth rates for extended periods of time and invest in human capital, infrastructure, and technological advancements to boost its productivity. Otherwise, the feeling of being poor may persist, even if the country is growing at a noticeable pace.