Countries Grow at Different Rates because they Accumulate Capital at Different Rates - Essay Example

COUNTRIES GROW AT DIFFERENT RATES BECAUSE THEY ACCUMULATE CAPITAL AT DIFFERENT RATES due: A country’s national income is the amount of goods and services the country produces. It is measured in terms of the gross domestic product as compared to the countries per capita income. of the country within a specific period, for example, a year. X = C + I + E + G Where X = GDP C = Consumer Spending I = Investment made by industry E = Excess of Exports over Imports G = Government Spending In the world, today, countries participate in international trade depending on the diplomatic relationships between the different states. Countries accumulate wealth at different rates depending on a number of factors (Brezina 2012, p.8). This has led to a shift in the economic power from one nation to another. Accumulation of wealth can be viewed in two ways. The first is where one party amasses wealth at the expense of another. The second is where there is an increase in the amount of wealth for both parties. It happens due to a mechanism in place that generates wealth for both parties. These two mechanisms cannot work in isolation. In the economic wars, available countries are using both tactics to gain economic advantages over others. Therefore, I agree with the argument that the difference in the rate of growth of countries is brought about by their differences in the ability to accumulate wealth. A look at the two graphs above reveals a significant difference in the rate of GDP growth between a developed country and a developing country. There are three theories that expound how the difference in the rate of accumulating wealth determines the variation in the rate of growth between the various countries. The theories are as follows: The neoclassical theory The theory argues that the economic growth of a country is dependent on the output of its individual citizens. In country where the capital per individual is large, the rate of economic growth is higher. Therefore, in countries where the level of technology is high, lesser employees are required per unit of output. This cuts down the labour cost and increases the capital goods which have higher returns on the inputs. This confirms that the higher the capital goods per individual, the more the more the returns per input and hence a higher growth rate is achieved (Setterfield 2010, p.49). Marxian economics theory Karl Marx in his theory argues that, the rate of accumulation of wealth is determined by how much profit is returned back into the production process in order to produce more profit. He measures the rate of wealth accumulation by how much the capital is grown. The amount invested back into the production process determines how fast the wealth of the nation grows. He further explains that, the process of accumulating wealth involves legal trading between two parties for the purpose of making profit or just acquiring property from someone at their expense. This two process breeds both fair and unfair competition among nations for the purpose of gain (Canterbury 2012, p.14). The Harrod – Domar model emphasises on savings and reinvestment. He explains that, the more a nation saves and invests, the more it is able to accumulate wealth. Even so, some critics have argued against the savings idea since savings alone without investment does not translate into accumulation of wealth. The mathematical expression for Harrod – Domar models is shown below. ΔQ/Q=ΔQ/X÷Q/X= s/q Where X is the national income, Q is the fixed capital q=K/X is a constant and s is the ratio of savings to Y. The assumption is that, all the savings are invested back into the production process (Van Den Berg & Lewer 2007, p.82). The rate of wealth accumulation for any nation is dependent on the balance of trade for that nation. If the imports exceed the exports for a particular nation, then it is disadvantaged economically and may end up in debt. Those countries with a favourable balance of trade have a better advantage of accumulating wealth. Several factors support the above theories. These factors have led to the differences in the levels of national income and therefore the ability to accumulate wealth: 1. Level of technology The country, which is more advanced in technology, is better able to accumulate more wealth than those that are behind in technology. The reason for this is that; better technology minimises the cost of production and raises the quality and quantity of production. The level of production per individual increases and the level of innovation increases as well. This puts the less developed countries at a disadvantage. This factor, therefore, explains the differences in the levels of income between different countries. 3. Availability of natural resources The natural resources in any given country are a major determinant of the level of production of that country. Countries with natural resources are likely to have a larger national income than those with fewer natural resources. The natural resources stimulate production by availing raw materials for the production process (Finley 2006, p.114). 4. The level of corruption, nepotism, tribalism and gender discrimination The level of production of particular countries in the world has been reduced due to these factors. It has been noted that in nations where the levels of corruption, nepotism, tribalism and gender discrimination are high, the national incomes of these nations are low. This observation is true in most developing countries. In comparison, the more developed countries with high national incomes have been noted to have very low levels of corruption. This may be ignited by the fact that the countries with higher national incomes are better able to deal with these vices than those countries with low levels of national income. It, therefore, brings out the differences in the level of growth between different countries (Campos & Pradhan 2007, p.224). Conclusion The above factors when analysed, bring out nature of the balance of trade for a particular nation, hence its ability to accumulate wealth. Countries that accumulate more wealth have a better chance at national growth than those that accumulate less wealth. Even though the two theories provide a different explanation, the outcome is true for both. The factors considered above do not work in isolation, but their collective effects determine the rate at which the different nations accumulate wealth and hence the rate at which they grow. Going by the two theories above, it is true to say that the process of wealth accumulation could result in conflicts due to unfair competition. Wealth accumulation is the cause of a lot of evil in the world today. Bibliography BREZINA, C. (2012). Understanding the gross domestic product and the gross national product. New York, NY, Rosen Pub. CAMPOS, J. E., & PRADHAN, S. (2007). The many faces of corruption tracking vulnerabilities at the sector level. Washington, D.C., World Bank. http://public.eblib.com/choice/publicfullrecord.aspx?p=459373 CANTERBURY, D. C. (2012). Capital accumulation and migration. Leiden, Brill. FINLEY, L. A. (2006). Perspectives on economic growth. New York, Nova Science Publishers. N, T. (2014). Ethiopia GDP Annual Growth Rate | 1982-2015 | Data | Chart | Calendar. Retrieved January 9, 2015, from http://www.tradingeconomics.com/ethiopia/gdp-growth-annual H, T. (2014). United States GDP Annual Growth Rate | 1948-2015 | Data | Chart | Calendar. Retrieved January 9, 2015, from http://www.tradingeconomics.com/united-states/gdp-growth-annual SETTERFIELD, M. (2010). Handbook of Alternative Theories of Economic Growth. Cheltenham, Edward Elgar Pub. http://public.eblib.com/choice/publicfullrecord.aspx?p=534831. VAN DEN BERG, H., & LEWER, J. J. (2007). International trade and economic growth. Armonk, NY [u.a.], Sharpe. Read More