El Salvador and Costa Rica are two countries in Central America. Despite located in the same geographical area, the countries have significantly different GDP per capita levels. Costa Rica's GDP per capita is about four times that of El Salvador.

Figure 1 displays a plot of GDP per capita and the Gini coefficient for countries for which 2018 data are available.

 If income distribution was the sole reason for GDP per capita differences between these two countries, then in which country would you expect stronger GPD per capita growth? Briefly justify your answer

 

Clearly, income distribution is not the only determinant of GDP per capita. Table 2 contains information about religious affiliations in both countries.

 

 

Argue why there might be a relationship between the population distribution of religious affiliations and ethnic fractionalization and can the data in Table 2 explain why Costa Rica has higher GDP per capita?        

 

Perhaps population density can explain the differences in GDP per capita between both countries. Nearly 60% of all Costa Ricans live in the metropolitan area around capital San José, while only 36% of all Salvadorans live in the metropolitan area of capital San Salvador.

 

Explain why concentration of economic activity may lead to concave rather than convex production functions and may this explain the difference in GDP per capita between the two countries?      

Figure 1: GDP per capita and the Gini coefficient, 2018 2018 GDP per capita (US$ 2015) 120,000 100,000 80,000 60,000 40,000 20,000 0 10 20 30 2018 Gini coefficient 40 50 El Salvador Costa Rica 60