1.

Introduction

Long run economic Growth

Long run economic growth can be defined as an increase in the aggregate supply which results in
an increase in national output. In other words it is an increase in the quantity of those goods and
services that were produced by an economy. For example if there occur an increase in nation’s
GDP due to abundance of resources than there will an increase in the full employment level of
that output which represents a sustained growth level followed by low inflation.

Determinants of long-run include the following:

• Productivity Growth
• Demographic changes
• Participation of labor force

Will the poor countries catch up rich countries by growing faster?

While considering the catch-up affect it describes a theory where one believe that the poor
countries have capacity to grow faster than the rich countries to the extent that all countries’ per
capita income level will meet. Simply the poor countries tend to catch-up to vigorous economies.
The catch-up affect also speculates to convergence theory. There are some of the key ideas on
which we can predict the catch-up affect.

• Law of diminishing marginal returns: in this case let’s assume that a country makes
investments and in return gain profits. The amount which a country gain will eventually
be less than that of invested. In this regard when a capital-rich country invests their
returns will not be as strong as those in the developing countries.
• Additionally poor countries being not so strong in terms of production methods therefore
they have benefited to change their production methods as well as technologies. Advance
countries being one step further from the developed nations always have to face losses if
their technological experiments failed in contrast the developing nations if follow only
those strategies of advanced nations which benefited them they experienced faster growth
rates as compared to those of developed nations.
Identify between Conditional and Unconditional Convergence:

The concept of convergence has been discussed earlier. There are three types of convergence but
here only two will be considered as follow:

Unconditional Convergence:

In unconditional convergence developing countries tries to catch-up the developed countries in

order to make the same living standards throughout the world in the long-run. This can be
predicted by Solow Growth model under some special circumstances i.e. suppose that throughout
the world countries differ from one another in terms of their capital-labor ratio. In rich countries
there is high capital-labor ratio along with the high levels of per worker output. In comparison
countries with low income have lower capital-labor ratios as a result the output per worker
lowers. If we assume that both less developed and developed nations are same on all other
patterns including production functions, rates of population growth and saving rate. Under such
circumstances having difference in their capital-labor ratios these countries will reach same
steady state. In a clear stance, it means that if countries have identical basic characteristics, their
capital-labor ratios and standards of living will converge unconditionally, even some countries
have to start from the initials yet the can have ability to make with those of the developed
nations.

Conditional Convergence:

Let’s assume that the countries differ in their saving rates, production function and additionally
rate of population growth they will manage to converge in the long-run with a different steady
state where the ratios of capital-labor differs along with the difference in the standards of living.
In this regard if countries have the basic characteristic which differ there will observed the
conditional convergence by following Solo Growth model. This means that the two groups of
countries will converge only if there are similar fundamental characteristics. For example there is
a case when conditional convergence observed the low income country will find a way to catch-
up the rich country but this will happen for a day or two. If a rich country has higher saving rates
as compared to that of rich country than it will not be possible for poor country to catch-up the
rich country.
 2. Background

A summary statistics table for all sovereign countries for years 1960, 1990 and 2015 is provided
as follow:

The selected ten countries from the above list includes 5 rich countries and 5 poor countries
named:

Canada, Switzerland, USA, Britain, China, Haiti, Fiji, Ghana, Iraq, Nepal

The important key historic factors that were observed during the year 1960, 1990 and 2015 along
with GDP per capita of the selected countries is discussed below:

1960:

1960 was considered as one of the most destructive decade in the history of world. During this
decade various discrepancies including Civil rights movement, political murders, the devastating
generation gap and antiwar protests were observed. Therefore this decade was considered one of
the destructive era of human history. These disparities largely affect the GDP per capita of the
countries as a whole. Further during the decade the phenomenon of convergence was not
observed as the major economies were busy in expansions due to which there observed a Cold
War which further worsen the situations and thus there observed a sharp slowdown in growth
from the period 1960 to 1980. During this period the large economies were facing the
reconstruction era so for them there observed the increase in GDP per capita but on the other
hand poor economies can’t manage to eliminate the impacts of previous worsen situations
therefore GDP per capita drops down.

1990:

At the start of 1990s it was observed that now economies can find a clear way to boost up. The
decade of “1980” was considered as the “lost decade” which shows that whenever government
intervene in the economy by controlling prices, curbing foreign exchange and distorting trade
regimes it will lead to repressed financial markets, wastage of resources and obstructed growth.
Therefore during this period experts held the opinion that developing countries can now find a
way to sustain their growth. This vision was mostly found held in the “Washington Consensus”
which was meant to introduce reforms which were needed to rescue the countries of Latin
America from the progression of inflation and the low growth rates.

"Sharp therapy" that Russia and other developed economies experienced during the 1990s was a
massive disappointment, particularly when contrasted with the high-development change in
China; yet after some of the terrible losses recorded in the economic history, there observed an
economic restoration in 1990. These situations on one hand cause the increase in GDP per capita
for some nations while for other it leads to further crisis. The situation were not remain same for
all of the economies because some of the emerging economies find their way to boost up while
others escalate under such circumstances.

2015:

In 2015 the estimated growth rate was 3.3 percent which was lower than that in 2014 which
shows an uplift of the developed economies and fall of the less developed or emerging
economies. The drivers for the uplift of economies of developed nations were easy financial
conditions, impartial fiscal policy, fall down of fuel prices and improvements in the labor
markets which bring confidence in them. On the other hand in less developed economies the
slowdown in growth occur due to constricted external financial conditions, structural disparities,
lower prices of commodity along with the economic agony of the geopolitical factors, and
China’s rebalancing. The risk of the whole economic activity remains downside due to which
there occur the risk for downward economic growth in less developed economies.

3. Data Analysis

4. Explanation of Economics Growth and Convergence

5. Conclusion

Conclusion

The above statistic shows that the less developed economies have potential to grow faster,
consider the case of China and India. The supporting argument in this regard is this that the less
developed countries have ready-made pattern to uplift the economy when they follow the
techniques adopted by developed countries and in this way they can manage to grow faster
without wasting their time. The only time when the less develop countries failed to experience
high growth rates is when the economic disparities occur due to war and terror like situations.
Moreover in long-run a less developed country can only managed to boost its economic activity
if it follows the following points:

• When there are low levels of government spending government can still manage to
advance the development.
• It is necessary for the developing economies to build their fiscal policies along with the
markets formally and then rise the spending needs.
• The government spending of the less developed economies tend to increase but in doing
so it is necessary to consider the redistribution process and services provided by the
government.
 • It has been observed that the government spending along with other economic indicators
remains fluctuated since WWII either in the developed economies
While considering these points we come to know that the less developed countries in this way or

that can manage to uplift their economies yet the claim can’t be consider true for all less

developed nations.
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