Question #15

of 36 Which of the following statements regarding convergence hypotheses is least accurate? A) The neoclassical theory contends that countries will eventually have the same growth rates and per capita income. B) The club convergence hypothesis contends that poorer countries with similar institutional features to those of richer countries will grow rapidly to catch up with their peers. C) The conditional convergence hypothesis contends that convergence of living standards requires countries to have the same population growth rates. Wisterbon, Pratia and Surico are neighboring nations. The three countries share borders and frequently trade with each other. Pratia A developing nation with an abundant oil reserves Primary economic activity is oil industry Wisterbon A developing nation focusing on labor intensive industries because it lacks many natural resources Surico A developed nation Largest trading partner for both the other two countries The following economic and demographic statistics are available for the three countries. Wisterbon Pratia Surico GDP (in $ billions) 10 years ago $100.0 $100.00 $3,000.00 GDP (in $ billions) Current $156.0 $164.00 $4,209.00 Long-term growth rate in technology (est.) 1.5% 1.2% 2.1% Long-term growth rate of capital 4.9% 4.40% 3.4% Sovereign credit rating A A+ AAA Savings rate (average is 10.0%) 12.5% 10.0% 5.0% Population (in millions) 10.2 10.0 50.4 Labor Growth Rate 2.8% 2.5% 0.6% Cost of capital relative to total factor cost 30.0% 35.0% 27.5% Capital Growth Rate 4.9% 4.4% 3.4% TFP Growth Rate 1.5% 1.2% 2.1% The three countries have sent their top finance ministers and economists to the annual Trade and Economic Growth Forum (TEGF) to discuss potential trade and growth opportunities. Comments pertaining to concerns regarding future growth potential included: Economist #1: We are concerned about the GDP per capita and population growth. The current GDP per capita appears to be beyond the subsistence level. Economist #2: We are concerned that the output per capital ratio has been constant. It is likely that the equilibrium growth rate has been reached and the economy cannot grow any faster. Economist #3: We are concerned that we are not investing enough in infrastructure and education to increase the growth rate. Some common initiatives for economic growth were listed from the TEGF: 1. Fund a technology research center 2. Lower trade barriers 3. Provide financial incentives for innovation 4. Coordinate energy policies 5. Invest in education Each country decided to adopt four of the five initiatives. Pratia did not like lowering trade barriers. Surico did not like coordinating energy policies. Wisterbon did not like providing financial incentives for innovation.