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How it is possible that two steady states exist if the economies have similar rates of depreciation, population growth and technological progress


Use the following articles to answer the questions (you may also use external sources.

Why Economists Are Still Grasping for Cure to Global Poverty

Africa’s Poverty Trap

Why Foreign Aid Is Hurting Africa

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa

Global Crisis Slowed U.N. Antipoverty Drive

IMF Lifts Africa Growth View

Answer all 7 questions.  Type your answers. Print it – Make sure you leave enough space for diagrams, and draw appropriate diagram by hand.


1) Graphically show how it is possible that two steady states exist if the economies have similar rates of depreciation, population growth and technological progress. Under which condition might the economy eventually end up in the low k steady state? Explain the intuition.

Based on the diagram above, discuss critically whether countries are converging to similar per capita income? Are there any empirical studies (search in google scholar and cite two papers) to support your claim?  (Hint: countries converging or diverging)   (2 points)

2)  Could a change in the savings rate, s, lift the economy out of its poverty trap without outside assistance in a club economies? If yes, characterize the minimum change in the savings rate needed and whether it will have to be permanent. If no, explain why not.  Use relevant diagram to demonstrate your claim.  (2 points)


3) What is meant by the “germ theory of disease” as it applies to the

economics of poor nations?  What would such a theory look like?  Why is

it important for economists to discover such a theory? (2 points)


4) What is foreign aid? What role has foreign aid played in the economic development of many African nations over the past 50 years? How do free markets foster economic growth? Can countries grow out of a poverty trap without the help of foreign aid? What evidence is there that this is possible? (2 points)


5) What is the Millennium Development Program? According to Easterly, what is missing from this program? (2 points)

6) IMF Warns Eastern European Income Convergence Has Stalled

Based on the article above, according to the growth models we learned, discuss critically convergence/divergence in Eastern European countries (also known as transition economies).  (2 points)

  1. a) “As the Czech Republic, Estonia, Hungary, Poland and Slovenia embark on the exacting process of joining the European Union, they need only look as far as Greece to spot the rewards — and the dangers — that lie ahead”. Discuss critically the statement.
  2. b) Discuss Productivity Convergence of European Economies.
  3. c) Do you think Markel’s Harmonic Convergence a viable one for Europe?


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