What do the classical growth theory and the new growth theory predict for global growth amongst different nations? Comment on the accuracy of the predictions
What will be an ideal response?
The classical growth theory predicts that nations will produce only the subsistence level of real GDP per person. This prediction is incorrect. According to the theory, each country is driven to the subsistence level by increased population growth whenever real GDP per person exceeds the subsistence amount. Hence the classical theory predicts that the nations with the highest levels of real GDP per person will be the nations in which real GDP per person is falling the most rapidly. This prediction also is wildly at variance with the facts.
The new growth theory predicts that nations will grow indefinitely and that the growth rate depends on the incentives within each nation to save, invest, accumulate human capital, and develop new technology. Hence the new growth theory predicts that real GDP per person will converge among some nations (those with similar incentives) while the gaps in real GDP per person among other nations will persist. This prediction is accurate.
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What will be an ideal response?
The above figure illustrates that if this country wishes to move from its current production point (labeled "Current") and have 10 more tons of food, it can do this by producing
A) 10 more tons of clothing. B) 10 fewer tons of clothing. C) 5 more tons of clothing. D) 5 fewer tons of clothing.