Factors That Causes The Gap Between Countries



Factors That Causes The Gap Between Countries

Introduction

Developed countries, which can also be classified as rich countries consists of the OECD (organisation for economic cooperation and development) countries and countries like North America and the pacific and the industrialised countries, which are the centrally planned economies of Eastern Europe. On the other hand the developing countries, which can be classified as poor countries, includes the Middle East, all of Latin America and the Caribbean, Africa and Asia except Japan. In this essay two main factors that causes the gap between countries will be discussed, they are growth rate and income per capita. The main determinants of growth rate are the production function of an economy and its government policies. Production function consists of the labour force, Capital and the raw materials of an economy. (Eckstein, 2005)

Discussion

They are some difficulties when trying to classify countries as rich and poor, to compare the rate of development in different countries over time, the measurement of real per capita and real living standard between countries.

Two problems must be taken into account. First is the problem associated with national income accounting especially in developing countries. (Katz, 2006) The second is the problem of converting each country's per capita income in domestic currency into common unit of account to enable us to make international comparisons of living standard (typically the U.S dollars). The method used is called the Purchasing Power Parity (PPP), the idea that similar foreign and domestic basket of good should have the same price when priced in terms of same currency.

In the Solow growth model, he implies that if all countries have the same level of income, poor countries will grow faster than rich countries and will eventually catch up at the steady state. Why is that? In reality not all countries have the same level of income and therefore we should examine the level of income of countries around the world and whether they are converging or not?

Main factor that will lead to convergence is globalisation and other factors like countries to having the same underlying production function, same level of saving, same population growth, same growth of technology and same level of incomes. Also other factors like policy choices, geographical characteristics and natural endowments. (Dickens, 2006)

Most of these factors will be discussed in this essay and on that base we can conclude whether the gap is converging or not.

Determinants of economic growth

Economic growth and increase in average income rate are the main determinants that leads to the development process in a country, but what determines the rate of growth of an economy and its aggregate level of output? Countries with higher level of output tend to have a larger capital stock, such as more roads, bridges, factories etc. Output depends on how many people work and how productive they are. Therefore capital stock is influenced by labour productivity, were labour productivity depends on levels of education and the general health of the ...