Question 1

What do economic historians mean by the "Great Divergence"?

Accepted Answer

The term "Great Divergence" refers to a period in history starting in the late 18th century when the Western world, particularly Europe and later North America, began to experience unprecedented economic growth and industrial development, leading to a significant increase in wealth and living standards compared to the rest of the world. This divergence became especially pronounced during the 19th and early 20th centuries.

Economic historians use the term to describe the process by which the Western economies, especially the United Kingdom and the United States, pulled ahead of other regions, including Asia, the Middle East, Africa, and Latin America, which had been relatively comparable in terms of economic output and technology up until that point. Before the Great Divergence, countries like China and India were among the world's largest economies due to their large populations and sophisticated agrarian economies.

Several factors contributed to the Great Divergence:

1. **Industrial Revolution**: The technological innovations and the rise of mechanized manufacturing in Britain, which later spread to other parts of Europe and North America, dramatically increased productivity and economic output.

2. **Institutional Factors**: The development of property rights, legal systems, and political stability in Western countries provided an environment conducive to economic growth and the accumulation of capital.

3. **Colonialism and Trade**: European nations, through their colonial empires, had access to vast resources and markets around the world. This allowed them to benefit from global trade networks and the exploitation of colonial territories.

4. **Scientific Advancements**: The Enlightenment and the scientific revolution contributed to a culture of innovation and the application of scientific methods to industrial processes.

5. **Geographical Factors**: Europe's geography, with its navigable rivers and proximity to the Atlantic Ocean, facilitated trade and interaction with different parts of the world.

6. **Demographic Changes**: Changes in population dynamics, including urbanization and changes in fertility rates, influenced labor markets and economic structures.

The Great Divergence has had profound implications for global economic history, shaping the modern world's geopolitical landscape and creating significant disparities in wealth and power between different regions. It is a central concept in understanding the roots of contemporary global inequality and the historical processes that have led to the economic configurations we see today.

Question 2

What is the difference between cross-country comparisons of GDP per capita in US dollars and so-called purchasing power dollars (aka international dollars)?

Accepted Answer

GDP per capita is a measure of a country's economic output that accounts for its number of people. It's a way to compare the economic performance of different countries. When comparing GDP per capita across countries, economists often use two different methods: nominal GDP per capita in US dollars and GDP per capita based on purchasing power parity (PPP) in international dollars. Here's the difference between the two:

1. GDP per Capita in US Dollars (Nominal):
When GDP per capita is measured in US dollars, it is converted from a country's currency at current market exchange rates. This method is straightforward but can be misleading for cross-country comparisons due to the following reasons:

- Exchange rates can fluctuate significantly due to factors like speculation, interest rates, and short-term economic events, which may not reflect the actual economic conditions.
- Market exchange rates do not account for differences in price levels between countries. Goods and services may be cheaper or more expensive in one country compared to another, which isn't captured in the exchange rate.

Because of these issues, nominal GDP per capita can give a skewed view of the relative living standards or economic well-being between countries.

2. GDP per Capita in Purchasing Power Dollars (PPP):
To address the limitations of nominal GDP per capita, economists often use purchasing power parity. PPP takes into account the relative cost of living and the inflation rates of the countries when comparing the GDP per capita. This is done by comparing the prices of a basket of identical goods and services in each country.

GDP per capita in PPP terms is expressed in international dollars, which is a hypothetical currency that has the same purchasing power over GDP as the US dollar has in the United States. By using PPP, economists can make more accurate comparisons of economic productivity and living standards across countries because it reflects what people can actually buy with their money in their local economies.

In summary, the main difference between the two measures is that nominal GDP per capita in US dollars is based on current exchange rates, which can be volatile and do not reflect differences in price levels, while GDP per capita in PPP terms is adjusted for price level differences across countries, providing a more accurate comparison of the economic well-being of their citizens.

Question 3

What are the proximate factors of economic growth?

Accepted Answer

The proximate factors of economic growth refer to the immediate causes that directly affect the rate at which an economy can grow. These factors are often measurable and can be influenced by policy decisions and investments. The main proximate factors include:

1. Physical Capital: The stock of tools, machinery, infrastructure, and buildings that are used to produce goods and services. Investments in physical capital increase the productive capacity of an economy, leading to higher output.

2. Human Capital: The skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country. Education and training improve the quality of the workforce, which can enhance productivity and innovation.

3. Technological Innovation: The development of new products, processes, or methods that improve the efficiency and effectiveness of production. Technological advancements can lead to the creation of new industries and can be a significant driver of economic growth.

4. Entrepreneurship and Management: The ability to combine land, labor, and capital to create and market new goods and services. Effective entrepreneurship and management can lead to better organizational performance, increased productivity, and economic expansion.

5. Natural Resources: The availability and efficient utilization of natural resources such as land, minerals, and energy. While not a limitless source of growth, natural resources can provide a significant boost to an economy, especially when managed sustainably.

6. Institutional Framework: The set of formal and informal rules, including laws, regulations, and norms, that govern economic activity. Strong institutions that protect property rights, enforce contracts, and reduce corruption can create an environment conducive to investment and economic growth.

7. Social Capital: The networks of relationships among people who live and work in a particular society, enabling that society to function effectively. Social capital can lead to improved trust and cooperation, which can enhance economic performance.

These proximate factors are influenced by deeper underlying determinants, such as geography, culture, and history, which can shape the long-term trajectory of economic growth. However, the proximate factors are the ones that policymakers often target when trying to stimulate growth in the short to medium term.

Question 4

Name and explain major fundamental factors of growth.

Accepted Answer

The answer of Name and explain major fundamental factors of...

Question 5

Explain the concept of growth accounting.

Accepted Answer

The answer of Explain the concept of growth accounting....

Question 6

What are the main drivers of labour productivity growth?

Accepted Answer

The answer of What are the main drivers of labour...

Question 7

What is total factor productivity (TFP)?

Accepted Answer

The answer of What is total factor productivity (TFP)?...

Question 8

What is the role of technology in catch-up growth?

Accepted Answer

The answer of What is the role of technology in...

Question 9

Explain the concept of the Environmental Kuznets Curve and the impact of eco-innovation on it.

Accepted Answer

The answer of Explain the concept of the Environmental Kuznets...

Question 10

What is meant by "directed technological change"?

Accepted Answer

The answer of What is meant by "directed technological change"?...

Question 11

Identify the 5 correct statements 
1. The term "Great Divergence" signifies the recent economic rise of China.
2. For cross-country comparisons of GDP per capita it is best to measure it in purchasing power parity dollars.
3. Culture is an important proximate factor of growth.
4. Chance can indeed be a fundamental factor of growth
5. Growth accounting aims at quantifying the contribution of the proximate factors to economic growth.
6. Labour productivity can only be increased by increases in total factor productivity (TFP).
7. TFP measures the impact of new capital investments on productivity.
8. For a full catch-up with a country at the technological frontier, technological catch-up will typically be accompanied by capital deepening.
9. The Environmental Kuznets Curve describes a potential empirical relation between per-capita income and the degree of pollution.
10. "Directed technological change" means that technical progress is controlled by the state.

Accepted Answer

The answer of Identify the 5 correct statements 
1. The...

Quiz 2: Global Production