COUNTRIES GROW AT DIFFERENT RATES BECAUSE THEY ACCUMULATE CAPITAL AT DIFFERENT RATES
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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 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 two 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:
• 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
