Introduction
Last week we introduced students to the Solow model of economic growth. The Solow model predicts that growth rates tend to diminish over time as the economy approaches a steady state level of output per worker. The steady state level of output per worker is shown to increase as savings rates or technology increase. The steady state level of output per worker falls as the population or grows. Changes to the labour force can affect the growth rate because they change the capital labour ratio, but they do not affect the ultimate steady state level of output per worker. In all of these cases, the curves in the basic steady state diagram are shifted to illustrate the effects of changing parameter values on the steady state level of capital.
Following a quick recap for the five or six of you that didn't make it, we'll examine the concept of absolute convergence next. Since the rate of capital accumulation per worker is essentially determined by the current stock of capital per worker, lesser developed countries are predicted by the model to grow more quickly than developed countries. However, the capital per worker will only generate faster growth rates if the values of the other parameters (savings, technology, population growth, etc.) are somewhat comparable. This implies that there is only conditional convergence.
We'll look at the evolution of world income, and talk about growth and convergence across the world.
Oh, and there will be a quiz in class.
Click the link below for slides, a handout version of the slides, and links to interesting articles.
Definition. Convergence, as used in the theory of economic growth, refers to the tendency of less developed economies to grow more quickly than more mature economies. . The theory is based on the idea that the growth rate will slow as an economy approaches the steady state level of capital per worker. Absolute convergence predicts that poor countries will grow more quickly regardless of their eventual steady state level of output. Conditional convergence predicts this pattern only if the countries have similar steady state levels of output.
Slides
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Links
Xavier Sala-i-Martin:THE WORLD DISTRIBUTION OF INCOME:FALLING POVERTY AND… CONVERGENCE,QJE, 2005. (pdf)
"Economic Growth (Advanced Series in Economics)" (Robert J. Barro, Xavier Sala-i-Martin)