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Rich Nations, Poor Nations: How Much Can Multiple Equilibria Explain?

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Abstract

This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the quantitative implications of a simple two-sector general equilibrium model that gives rise to multiplicity, and calibrate the model for 127 countries. Under the assumptions of the model, around a quarter of the world’s economies are found to be in a low output equilibrium. We also find that, since the output gains associated with an equilibrium switch are sizeable, the model can explain between 15 and 25% of the variation in the logarithm of GDP per worker across countries.

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Authors and Affiliations

  1. Department of Economics, University of California — Berkeley, 549 Evans Hall #3880, Berkeley, CA, 94720-3880, USA

    Bryan S. Graham

  2. Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK

    Jonathan R. W. Temple

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Graham, B.S., Temple, J.R.W. Rich Nations, Poor Nations: How Much Can Multiple Equilibria Explain?. J Econ Growth 11, 5–41 (2006). https://doi.org/10.1007/s10887-006-7404-5

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