a) True, False, Uncertain: The figure below of the growth in income per capita o

Question

a) True, False, Uncertain: The figure below of the growth in income per capita over time as a function of initial real GDP per capita shows good evidence of an income-based “poverty trap” in which poor countries are trapped at poverty and cannot grow because they are poor.

b) True, False, Uncertain: The Solow growth model tells us that a flood of immigrants will, in the long run, raise interest rates and reduce wages.

c) True, False, Uncertain: What variables must be held constant to find convergence in the data on all countries?

Figure 4.9 Growth Rate Versus Level of Real GDP per Person for a Broad Group of Countries 2 08 06 ui .02 02 150 1100 8 22000 Real GDP per person in 1960

Explanation / Answer

A. Uncertian. The proposition , though true, cannot be ascertained by the given figure. The data points in the figure is a sctter diagram wiht a fitted regression line with many outliers. The poor countries having less Real GDP with a minimal growth side are the point at the left most side in teh graph. By this we cannot ascrtain whether the country is in "poverty trap" as the reason for the reduced real GDp maybe more due to increasing population rather than deceasing producutivity or production where in the fact the nominal GDp may be even higher than the rich countires. Sure the country is pooorer than others, but we cannot ascertain if its a poverty trap as other economic indicators such as demographic dividend,share of investment and consumption, government schemes need to be understood before arriving at a conclusion.

B. TRUE.The flood of iimigrants increases the labour force while the capital in the economy is fixed atleast in the short run. The reduces the capital labour ratio evethough their MPL is high due to sudden increase in popultaion. Since MPL determines wages and this depends on K/L ratio , immigration leads to a fall in wages. The increased capital compared to labour reduces the interest rate.

C. Holding a varaiable constant such as population or price level may bring a convergence of the data but the units of measurement would be different from each other making it impossible and also meaningless to do any kind of comparison or inference from the graph.

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