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Will technological improvements themselves run into diminishing returns over time? That is, will it become continually harder and more costly to discover new technological improvements? Perhaps someday, but, at least over the last two centuries since the Industrial Revolution, improvements in technology have not run into diminishing marginal returns. Modern inventions, like the Internet or discoveries in genetics or materials science, do not seem to provide smaller gains to output than earlier inventions like the steam engine or the railroad. One reason that technological ideas do not seem to run into diminishing returns is that the ideas of new technology can often be widely applied at a marginal cost that is very low or even zero. A specific additional machine, or an additional year of education, must be used by a specific worker or group of workers. A new technology or invention can be used by many workers across the economy at very low marginal cost.

The argument that it is easier for a low-income country to copy and adapt existing technology than it is for a high-income country to invent new technology is not necessarily true, either. When it comes to adapting and using new technology, a society’s performance is not necessarily guaranteed, but is the result of whether the economic, educational, and public policy institutions of the country are supportive. In theory, perhaps, low-income countries have many opportunities to copy and adapt technology, but if they lack the appropriate supportive economic infrastructure and institutions, the theoretical possibility that backwardness might have certain advantages is of little practical relevance.

Visit this website to read more about economic growth in India.

The slowness of convergence

Although economic convergence between the high-income countries and the rest of the world seems possible and even likely, it will proceed slowly. Consider, for example, a country that starts off with a GDP per capita of $40,000, which would roughly represent a typical high-income country today, and another country that starts out at $4,000, which is roughly the level in low-income but not impoverished countries like Indonesia, Guatemala, or Egypt. Say that the rich country chugs along at a 2% annual growth rate of GDP per capita, while the poorer country grows at the aggressive rate of 7% per year. After 30 years, GDP per capita in the rich country will be $72,450 (that is, $40,000 (1 + 0.02) 30 ) while in the poor country it will be $30,450 (that is, $4,000 (1 + 0.07) 30 ). Convergence has occurred; the rich country used to be 10 times as wealthy as the poor one, and now it is only about 2.4 times as wealthy. Even after 30 consecutive years of very rapid growth, however, people in the low-income country are still likely to feel quite poor compared to people in the rich country. Moreover, as the poor country catches up, its opportunities for catch-up growth are reduced, and its growth rate may slow down somewhat.

The slowness of convergence illustrates again that small differences in annual rates of economic growth become huge differences over time. The high-income countries have been building up their advantage in standard of living over decades—more than a century in some cases. Even in an optimistic scenario, it will take decades for the low-income countries of the world to catch up significantly.

Calories and economic growth

The story of modern economic growth can be told by looking at calorie consumption over time. The dramatic rise in incomes allowed the average person to eat better and consume more calories. How did these incomes increase? The neoclassical growth consensus uses the aggregate production function    to suggest that the period of modern economic growth came about because of increases in inputs such as technology and physical and human capital. Also important was the way in which technological progress combined with physical and human capital deepening to create growth and convergence. The issue of distribution of income notwithstanding, it is clear that the average worker can afford more calories in 2014 than in 1875.

Aside from increases in income, there is another reason why the average person can afford more food. Modern agriculture has allowed many countries to produce more food than they need. Despite having more than enough food, however, many governments and multilateral agencies have not solved the food distribution problem. In fact, food shortages, famine, or general food insecurity are caused more often by the failure of government macroeconomic policy, according to the Nobel Prize-winning economist Amartya Sen. Sen has conducted extensive research into issues of inequality, poverty, and the role of government in improving standards of living. Macroeconomic policies that strive toward stable inflation, full employment, education of women, and preservation of property rights are more likely to eliminate starvation and provide for a more even distribution of food.

Because we have more food per capita, global food prices have decreased since 1875. The prices of some foods, however, have decreased more than the prices of others. For example, researchers from the University of Washington have shown that in the United States, calories from zucchini and lettuce are 100 times more expensive than calories from oil, butter, and sugar. Research from countries like India, China, and the United States suggests that as incomes rise, individuals want more calories from fats and protein and fewer from carbohydrates. This has very interesting implications for global food production, obesity, and environmental consequences. Affluent urban India has an obesity problem much like many parts of the United States. The forces of convergence are at work.

Key concepts and summary

When countries with lower levels of GDP per capita catch up to countries with higher levels of GDP per capita, the process is called convergence. Convergence can occur even when both high- and low-income countries increase investment in physical and human capital with the objective of growing GDP. This is because the impact of new investment in physical and human capital on a low-income country may result in huge gains as new skills or equipment are combined with the labor force. In higher-income countries, however, a level of investment equal to that of the low income country is not likely to have as big an impact, because the more developed country most likely has high levels of capital investment. Therefore, the marginal gain from this additional investment tends to be successively less and less. Higher income countries are more likely to have diminishing returns to their investments and must continually invent new technologies; this allows lower-income economies to have a chance for convergent growth. However, many high-income economies have developed economic and political institutions that provide a healthy economic climate for an ongoing stream of technological innovations. Continuous technological innovation can counterbalance diminishing returns to investments in human and physical capital.

References

Central Intelligence Agency. “The World Factbook: Country Comparison: GDP–Real Growth Rate.” https://www.cia.gov/library/publications/the-world-factbook/rankorder/2003rank.html.

Sen, Amartya. “Hunger in the Contemporary World (Discussion Paper DEDPS/8).” The Suntory Centre: London School of Economics and Political Science . Last modified November 1997. http://sticerd.lse.ac.uk/dps/de/dedps8.pdf.

Questions & Answers

Helloo, im new, can i get to know more?
Saniya Reply
You ask questions on any topics you find difficult.
Favour
is price elasticity of demand the same as elasticity of demand
Favour Reply
not really
Victoria
hi
Gh
hello
Bhartendu
i hope everyone be ok
Gh
No
Hassan
please explain
Favour
No
William
explanations please
cleophas
price elasticity of demand is the reaction of customers /demand to price changes(increase or decrease) elasticity of demand is the reaction of prices brought about by the change in demand
Victoria
thank you
Favour
state the laws of demand and supply
William
dd: when price rises demand decreases whereas when price reduces dd rises ss: when ss rises the price rises and when ss decreases price also reduces. There is a positive relationship
Dhoonah
nice
Victoria
Draw a demand curve graph
William
though price elasticity and elasticity are used interchangeably, the demand can respond to income changes and prices of related goods as well.
Gurpalak
what is economic
Seray Reply
It is a social science which studies human behavior as a relationship between ends and scarce which have alternative uses
Obeng
what is norminal wage
Demba Reply
is the wages measured in money as distinct from actual purchasing power
Favour
what is demand curve
Azeez Reply
this is a curve that slop downward from left to rich
Obeng
yes
Basanta
different between capital and wealth
Samuel Reply
What is scale of reference?
Finda Reply
What is monopoly?
Finda
It is the control of market by single seller or producer
Mayen
the exclusive possession or control of the supply or trade in a commodity or services
Brains
what is scarcity
Bonny Reply
scarcity means that the resources which we can produce goods and services relatives to wants for them.
Bonny
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
Bonny
needs of people ar called demand
Francis
what's the difference between opportunity cost and production possibility curve?
Francis
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
Bonny
different between capital and wealth
Samuel
apportunity cost means the profit lose when one alternative is selected over other
Bonny
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Abubakari
It deals with making choices in the face of scarcity
Abu
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
Bilal
what is scarcity
Bonny
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
Sean
what is perfect complements?
Bilal
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
Winny
economics is important on expenditure analysis
Umar
because it is to make choice
Puosour
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Sarah
Economic is important because of the fact of scarcity and desire for efficiency...
Ernest
it enable us to make rational choice
Osman
what is unemployment
scor
unemployment occurs when a person is actively searching for employment is unable to find work .....
Fatema
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
Lintoya
It is important because economics provide solutions about scarcity.
Pobreng
which of the following measures will the government take during inflation?
Ally

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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