To discuss the theory and empirical evidence that the gap between rich and poor countries converges we should define what are poor and rich countries? What causes the gap between countries? What are the main factors that will lead to convergence? Is the gap between poor and rich countries really converging?
Countries are classified on the bases of their degree of development and per capita income (total income added to the total output of a country divided by its population), which is a useful indicator of development.
Developed countries, which can also be classified as rich countries consists of the OECD (organisation for economic cooperation and development) countries and countries like North America and the pacific and the industrialised countries, which are the centrally planned economies of Eastern Europe. On the other hand the developing countries, which can be classified as poor countries, includes the Middle East, all of Latin America and the Caribbean, Africa and Asia except Japan.
In this essay two main factors that causes the gap between countries will be discussed, they are growth rate and income per capita. The main determinants of growth rate are the production function of an economy and its government policies. Production function consists of the labour force, Capital and the raw materials of an economy.
They are some difficulties when trying to classify countries as rich and poor, to compare the rate of development in different countries over time, the measurement of real per capita and real living standard between countries.
Two problems must be taken into account. First is the problem associated with national income accounting especially in developing countries. The second is the problem of converting each country's per capita income in domestic currency into common unit of account to enable us to make international comparisons of living standard...