Why China and India grow at faster rates than more resourceful USA and Japan
Using the concept of the Simple Solow growth model, let us try to understand why the more advanced economies like Japan and USA, which have higher levels of capital and technology at their disposal are growing at rates of 1-2% compared to China, as especially India which is a relatively less developed nation but is a leading emerging markets country. growing at an exceptional 7-8% rate.
Growing from a low base, i.e. when you do not have enough capital or technology at your disposal means that even small additions can give high growth rates. A 20$ addition to existing capital stock of 50$ means a 60% growth, while the same on a 1000$ base would merely mean a 2% growth!
It is the default property of capital addition to give diminishing returns that is, as we add to the capital stock, the growth in output increases, but at a decreasing pace. To understand this, consider the following example:
There is a farmer who has been tilling his land manually so far. If he buys a new tractor, it will greatly add to his output growth as he is now able to till his lands faster. Say the output shoots up by 50%. The next tractor is bought to be used if the first one breaks down, and so, the contribution of, or the utility provided by the 2nd tractor is much less compared to the first, say 20%. A third tractor might be used as a spare in case both break down, ultimately adding not more than, say 5% of value.
This principle of initial high returns, as is exhibited by developing nations is known as "catching up growth" while the latter slow down due to already existing high technology base is called "cutting-edge growth" as is the case of the developed world countries.
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