Using production function and MPK diagrams, answer the following questions. For simplicity, assume there are two countries, a poor country and a rich country.
1. Assuming that poor and rich countries have the same production function, illustrate how the poor country will converge with the rich country. Describe how this mechanism works.
2. In the data, countries with low living standards have capital-to-worker ratios that are too high to be consistent with the model used in.Describe and illustrate how we can modify the model use in to be consistent with the data.
3. Give your assumptions from , what does this suggest about the ability of poor countries to converge with rich countries? What do we expect to happen to the gap between rich and poor countries over time? Explain.
4. Using the model from , explain and illustrate how convergence works when the poor country has a marginal product of capital that is higher than that of the rich country.