key term - Conditional Convergence

Definition

Conditional convergence refers to the phenomenon in economic growth theory where economies with similar structural characteristics, such as preferences, technology, and policies, will converge to their own unique steady-state levels of income per capita, rather than converging to a common level. This contrasts with the concept of absolute convergence, where all economies are expected to converge to a single, common steady-state level of income per capita regardless of their initial conditions.

5 Must Know Facts For Your Next Test

1. Conditional convergence implies that economies with similar structural characteristics will converge to their own unique steady-state levels of income per capita.
2. The speed of convergence towards the steady-state level is influenced by the degree of diminishing returns to capital accumulation in the economy.
3. Empirical studies have found evidence of conditional convergence, where poorer economies tend to grow faster than richer economies when controlling for differences in structural characteristics.
4. Policies that influence an economy's structural characteristics, such as investment in education, infrastructure, and technology, can affect its steady-state level of income per capita and the speed of convergence.
5. Conditional convergence is a more realistic and nuanced view of economic growth compared to the simplistic assumption of absolute convergence, which often fails to hold in practice.

Review Questions

• Explain how conditional convergence differs from absolute convergence in the context of economic growth theory.
  • Conditional convergence refers to the idea that economies with similar structural characteristics, such as preferences, technology, and policies, will converge to their own unique steady-state levels of income per capita. This contrasts with absolute convergence, which assumes that all economies will converge to a single, common steady-state level of income per capita regardless of their initial conditions. The key difference is that conditional convergence acknowledges the role of structural factors in determining an economy's long-run growth path, whereas absolute convergence assumes that these factors do not play a significant role.
• Describe the factors that influence the speed of convergence towards an economy's steady-state level of income per capita under the concept of conditional convergence.
  • The speed of convergence towards an economy's steady-state level of income per capita under conditional convergence is influenced by the degree of diminishing returns to capital accumulation in the economy. Economies with higher levels of diminishing returns to capital will tend to converge more quickly to their steady-state levels, as additional investment in capital will yield smaller and smaller increases in output. Policies that affect an economy's structural characteristics, such as investments in education, infrastructure, and technology, can also influence the speed of convergence by altering the economy's steady-state level and the dynamics of capital accumulation.
• Evaluate the importance of conditional convergence in understanding real-world economic growth patterns and the implications for policymakers.
  • Conditional convergence is a more realistic and nuanced view of economic growth compared to the simplistic assumption of absolute convergence, which often fails to hold in practice. By acknowledging the role of structural characteristics in determining an economy's long-run growth path, conditional convergence provides a more accurate framework for understanding the diverse growth experiences of different countries. This has important implications for policymakers, as it suggests that a one-size-fits-all approach to economic development is unlikely to be effective. Instead, policymakers should focus on identifying and addressing the specific structural barriers and constraints faced by their economies, and implement targeted policies to enhance their unique steady-state levels of income per capita. This could include investments in human capital, infrastructure, and technological innovation, as well as the creation of an institutional environment that is conducive to sustained economic growth.

Related terms

Absolute Convergence: The concept that all economies, regardless of their initial conditions, will converge to a single, common steady-state level of income per capita.

Steady-State Level: The level of income per capita that an economy will converge to in the long run, determined by its structural characteristics.

Structural Characteristics: Factors such as preferences, technology, and policies that determine an economy's steady-state level of income per capita.