Question

1. What (do you think) is meant by a poverty trap (as opposed to an economy that has a delayed transition)? In the midterm, we highlighted a theory whereby low savings rates in countries with low incomes can produce a poverty trap. Are there ways in which specific copying technologies or policies adopted to facilitate or limit technological copying can produce a poverty trap? (This requires a different model of copying than we discussed in class (or a view where successful innovating countries adopt policies that limit the efficacy of copying by the poorest countries). There is not a unique right or wrong answer to this question. Can you give an example of such a mechanism that plausibly accounts for persistent income differences?

2. Consider the following data on the fictional countries of Sylvania and Freedonia. The production function is: y = Ak^(α)h^(1−α) , where α = 0.5. Assume that, in Sylvania, income y is 100, capital k is 125, and human capital h is 25. Assume that in Freedonia these numbers are 150, 100 and 60 respectively. (a) Calculate the level of productivity, A, in each country.
(b) Calculate the countries’ relative levels of output if all differences in output were the result of productivity.
(c) Calculate the countries’ relative levels of output if all differences in output were the result of factor accumulation.

Answer 1

The poverty trap involves mechanisms which perpetuate poverty through low savings and investment in capital, impacting economic growth. Technological copying can help low-income countries develop rapidly but requires supportive infrastructure and institutions to be effective. Calculating productivity and assessing output differences involves understanding the roles of productivity and factor accumulation in the production function.

Step-by-step explanation:

Poverty Trap and Economic Development

A poverty trap is a self-reinforcing mechanism which causes poverty to persist. If a country has low income, it can result in low savings, limiting investments in capital and education. This can lead to inadequate economic growth and an ongoing struggle against poverty. Technological copying or adaptation can be crucial for a country’s development, following the advantages of backwardness as described by Gerschenkron, where developing countries rapidly grow by adopting technologies from advanced economies. Nevertheless, these advantages might not be realized if the economic infrastructure and institutions are not supportive, limiting the opportunities to effectively adapt existing technologies.

Productivity and Factor Accumulation

To calculate the level of productivity, A, in both Sylvania and Freedonia, we use the provided production function y =
`Ak^(a)`
`h^((1-a))`, where in Sylvania, y = 100, k = 125, and h = 25, and in Freedonia, y = 150, k = 100, and h = 60 respectively. The productivity A in Sylvania works out to be 100 / (
`125^(0.5)` *
`25^(0.5)`) and for Freedonia 150 / (
`100^(0.5)` *
`60^(0.5)`). To discuss relative levels of output due to productivity versus factor accumulation, one must assume uniform productivity across both nations for factor accumulation comparison and identical capital and human capital for productivity comparison.