The Catch-Up Effect Says That Countries with Low Income Can

question 61

Essay

The catch-up effect says that countries with low income can grow faster than countries with higher income. However, in statistical studies that include many diverse countries we do not observe the catch-up-effect unless we control for other variables that affect productivity. Considering the determinants of productivity, list and explain some things that would tend to prohibit or limit a poor country's ability to catch up with the rich ones.

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Definitions:

Inverted Yield Curve

A rare financial situation where long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.

Short-Term Interest Rates

Interest rates applicable on loans or financial instruments that are due for payment within a short timeframe, typically less than one year.

Long-Term Interest Rates

Interest rates applied to loans or financial assets that are due for repayment in a period longer than one year.

Risk Premiums

The additional return demanded by investors for taking on higher risk, over and above the risk-free rate of return.