Question

The catch-up effect Consider the hypothetical economies of Hestiatis and Felheim, both of which produce bottles of bulg using only workers and tools. Suppose that, during the course of 40 years, the level of physical capital per worker nises by 5 tools per worker in each economy, but the size of each labor force remains the same. Complete the folliowing tables by entering productivity (in tems of output per worker) for each economy in 2025 and 2065. Initially, the number of tools per worker was higher in Hestiatia than in Pelheim. From 2025 to 2065, capital per worker rises by 5 units in each country. The 5-unit change in capital per worker causes productivity in Hestiatia to rise by a.___ amount than productivity in Pelheim. This illustrates the effect.

Answer 1

The 'catch-up effect' describes how economies with less capital develop faster than those with more, and in the scenario provided, Felheim would likely see a greater increase in productivity per worker compared to Hestiatis after both increase their capital by 5 units.

Step-by-step explanation:

The scenario described illustrates the concept of the catch-up effect in economics, which refers to the tendency for less developed countries or economies to grow more rapidly than more developed ones, thereby narrowing the income gap. This occurs because returns on capital are typically higher in countries with lower initial levels of capital, assuming similar technologies.

In our example, although the increase in physical capital per worker is the same in both Hestiatis and Felheim, we expect Felheim, which started with a lower base of capital, to experience a larger increase in productivity per worker.

Over time, this effect allows nations that start at a lower level of technological and capital base to improve their productivity at a faster rate than those with a more advanced starting point, assuming they can adopt existing technologies from more developed nations quickly.

As seen in the case of Hestiatis and Felheim, the productivity in Felheim would rise by a greater amount compared to Hestiatis, illustrating this catch-up effect, which is a fundamental concept in understanding international economic growth and convergence.