ABSTRACT
Economic integration among China, Hong Kong and Macau has been found in the previous chapter, such that per capita income levels of these economies have cointegrated with a long-run equilibrium relationship. The estimated value of the cointegrated vectors, however, has failed to satisfy the criteria as stated in Bernard and Durlauf (1995) and stochastic convergence has been rejected. Nevertheless, as explained in Karras (1997) and Ben-David (1996, 2001), economic integration driven by intensive development in trade transactions could narrow the income gap between trading partners and bring about income convergence. Subsequently, it is expected that, if stochastic convergence and long-run equalization in per capita income do not result from economic integration, the trading process may still bring about a catching-up process and narrowing of the income gap. In order to prove this hypothesis, the income convergence test will be performed to see whether the income disparities among China, Hong Kong and Macau improved after their economic integration.
