Module 6.3: Growth and Convergence Theories

Question 1

Theories of Economic Growth

Answer 1

classical growth theory,
neoclassical growth theory, and
endogenous growth theory.

Question 2

Classical Growth Theory

Answer 2

population growth increases whenever there are increases in per capita income above subsistence level due to an increase in capital or technological progress

Question 3

Subsistence level

Answer 3

minimum income needed to maintain life.

Question 4

Neoclassical growth theory

Answer 4

sustainable growth of the economy is a function of population growth, labors share of income, and rate of technological advancement. Other growth gains are temporary

Question 5

neoclassical growth theory states that:

Answer 5

Sustainable growth of output per capita (or output per worker)(g*) is equal to the growth rate in technology (θ) divided by labor’s share of GDP (1 – α).

Question 6

Sustainable growth rate of output (G*) is equal (Neoclassical)

Answer 6

to the sustainable growth rate of output per capita, plus the growth of labor (ΔL)

Question 7

Under neoclassical theory:

Answer 7

• Capital deepening affects the level of output but not the growth rate in the long run.
• An economy’s growth rate will move towards its steady state regardless of the initial capital to labor ratio or level of technology.
• In the steady state, marginal product of capital (MPK) = αY/K is constant, but marginal productivity is diminishing.
• An increase in savings will only temporarily raise economic growth.
• Developing countries (with a lower level of capital per worker) will be impacted less by diminishing marginal productivity of capital, and hence have higher growth rates as compared to developed countries; there will be eventual convergence of growth rates.

Question 8

endogenous growth theory

Answer 8

technological growth emerges as a result of investment in both physical and human capital

Question 9

convergence hypotheses

Answer 9

Absolute
Club
Conditional

Question 10

absolute convergence

Answer 10

less-developed countries will converge to the growth rate of more-developed countries.

Question 11

conditional convergence

Answer 11

convergence in living standards will only occur for countries with the same savings rates, population growth rates, and production functions

Question 12

club convergence

Answer 12

poorer countries that are part of the club will grow rapidly to catch up with their richer peers