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In this professional assignment – 2 paper, I am including the assumption of Solow Growth model. The catch-up growth, middle income trap, diminishing marginal returns to capital are describing in this paper. I am going to add some point of prosperity without growth which will create causes.
Robert Solow won Nobel Prize in Economics in 1987. Neo-classical theory of economic growth developed by Solow Model (Jim, 2012, para -). Solow model’s important feature is economic growth and it comes from capital, labor, ideas/new technology. Solow model helps us to determine how much of growth came from adding more capital inputs, labor, technology and innovation (Tyler).
In long term, economic growth and the public policies influence and it should be self- evident but try to attach some numbers to the concept. Across countries, the range of livings standards are enormous. In these countries Real income per capita, Bangladesh, Ethiopia, Haiti and Bolivia was less than 5% of U.S. per capita income in 1989. Not all countries remain poor, while other countries couldn’t able to raise their standard of living above mere subsistence levels. Both Botswana and Korea had 10 percent less per capita incomes than in the United States in 1960 and as very poor classified by any metric. Botswana had increased its per capita income annual rate of about 7%. Korea grew at an annual rate of about 6%, resulting in an almost six fold increase in per capita income over the three decades (Plosser, p. 58).
Catch-up growth represents a poor countries are starting to catch up with a rich countries. Because in faster growing countries, high marginal rate of return on invested capital. For example: Japan and Germany growth rate is higher than U.S. after Second World War. Because they are doing catch-up; rebuild factories, repairing roads, cities back together. China is also follow catch-up growth so they grow so fast (Tyler). In terms of catch up in living standards, per capital income is measured by convergence of living standards. Existence of the middle income trap, to stay sustain growing economics feels hard and at a certain level rising per capita incomes beyond (Jim, 2012, para – 9 to 10).
Production’s function idea is explained in diminishing returns. In the steady state, how capital depreciation, investment offset such that capital or by extension, output stays constant. In the Human capital and conditional convergence, the shares of human capital has same characteristics with diminishing returns and depreciation (physical capital) but when institution are similar countries converge happens (Mruniversity, para – 12 to 18).
In some period of time, some countries are stuck in the middle income status and ow income status. GDP per capita simply stagnated in some cases is called middle income trap (Felipe, 2012, p. 4). To grow fast, China relied on labor and capital because of large population resulting in cheap labor. Largest exporter in the world is China, and (economy) depending on manufacturing and production. At some period of time they need to rely on innovation not only on labor or capital. In international markets, South Korea compete by producing labor intensive products such as clothing and they exported in the Past. After some years, the wages start to rise and their labor intensive products has less competitive or there is no advantage of low cost because of no appear of labor (Felipe, 2012, p. 4 ).
In economic term prosperity to recommend a continual increase in national and global economic output with a corresponding increase in people’s incomes. Income or wealth are not similar with prosperity. In a same way, rising prosperity and economic growth are not similar. Prosperity was simply the adverse infirmity because it is not cast by money (Tim, p. 16).
Just two percent of global income earns by fifth of the world’s population. Twenty years ago, inequality is higher in the OECD nations. Richer becomes richer and income of middle class in Western countries were static in real terms long before the recession (Tim, p. 6). Higher incomes must come from better choices, developed people lives and quality of life improved. The growth of economic and increasing prosperity are different from each other. Since people and planet both are damaged by growth (Tim, p.17). Prosperity without growth; climate change, resource depletion, social recession, food shortage are the main issues (Tim, p. 17).
Capital, labor and ideas/new technology are assumption of Solow Growth Model. In future, developing countries will catch up to the developed countries by applying catch-up model. For further increase in economic growth using labor & growth. To get fast growth nation has to rely on innovation. Otherwise there will possibility of middle income trap. Prosperity without growth creates some problems.