Absolute convergence is a concept in economic growth theory that describes the tendency of poorer countries or regions to grow at a faster rate than their wealthier counterparts, ultimately converging towards a similar level of per capita income or productivity. This phenomenon is rooted in the principle of diminishing returns, where countries with lower initial capital stocks experience greater returns on investment compared to those with higher capital stocks.
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Absolute convergence implies that if all countries have the same underlying characteristics, such as savings rates, population growth, and technological progress, then poorer countries will grow faster and eventually catch up to the income levels of richer countries.
The neoclassical growth model, developed by economists such as Robert Solow, provides the theoretical foundation for the concept of absolute convergence, which is a key prediction of the model.
Empirical studies have found mixed evidence for absolute convergence, with some studies supporting the theory and others finding that convergence is conditional on factors such as institutions, policies, and initial conditions.
The speed of convergence is influenced by the rate of diminishing returns to capital, with countries with lower capital stocks experiencing higher returns and faster growth rates.
Absolute convergence is distinct from conditional convergence, which allows for differences in steady-state income levels across countries due to variations in factors such as technology, institutions, and policies.
Review Questions
Explain the concept of absolute convergence and how it is related to the neoclassical growth model.
Absolute convergence is the idea that poorer countries or regions will grow at a faster rate than their wealthier counterparts, ultimately converging towards a similar level of per capita income or productivity. This phenomenon is rooted in the neoclassical growth model, which predicts that due to the principle of diminishing returns, countries with lower initial capital stocks will experience greater returns on investment compared to those with higher capital stocks, leading to faster growth rates and a convergence of income levels over time.
Describe the role of diminishing returns in the concept of absolute convergence.
The principle of diminishing returns is central to the concept of absolute convergence. As countries accumulate more capital, the marginal increase in output from additional capital investments will eventually decrease. This means that poorer countries, with lower initial capital stocks, will experience higher returns on investment compared to richer countries, allowing them to grow at a faster rate and catch up in terms of income levels. The speed of convergence is directly influenced by the rate of diminishing returns to capital, with countries with lower capital stocks experiencing higher returns and faster growth rates.
Analyze the differences between absolute convergence and conditional convergence, and discuss the implications for economic policy.
Absolute convergence and conditional convergence are distinct concepts in economic growth theory. Absolute convergence assumes that all countries have the same underlying characteristics, such as savings rates, population growth, and technological progress, and predicts that poorer countries will grow faster and converge to the same steady-state income level. In contrast, conditional convergence allows for differences in steady-state income levels across countries due to variations in factors such as institutions, policies, and initial conditions. The implications for economic policy are that policies aimed at promoting absolute convergence may focus on fostering capital accumulation and technological progress, while policies for conditional convergence may also need to address institutional and policy reforms to address the country-specific factors that influence steady-state income levels.
A form of economic convergence where countries or regions converge to their own steady-state levels of income per capita, which may differ across countries due to differences in factors such as technology, institutions, and policies.
Neoclassical Growth Model: A theoretical framework that explains economic growth based on the accumulation of capital, labor, and technological progress, and predicts the phenomenon of absolute convergence.
The principle that as more of a input is added to production, the marginal increase in output will eventually decrease, leading to the tendency of poorer countries to grow faster than richer ones.